ECON 204 1st Edition Lecture 11Outline of Last Lecture XV. Aggregate SupplyA. Shifts in short-run aggregate supplyB. Long-run aggregate supply curveXVI. Macroeconomic EquilibriumA. Short-runB. Long-runC. Supply and demand shocksOutline of Current LectureXVII. Fiscal PolicyCurrent LectureXVIII. Fiscal Policy In society there will always be needy people. Free rider problem: if free goods and/or services are provided everyone will try to get themThe economy is self-correcting in the long-run. Stabilization policy: use of government policy to reduce severity of recessions. Evidence fromthe past has shown that stabilization policies are stabilizing.Policy in the face of demand shocks – price stability is generally regarded as a desirable goal and to promote full employment (goals of the fed). Responding to supply shocks – there are no easy policies to shift short run aggregate supply curve.Policy dilemma: policy that counteracts the fall in aggregate output by increasing aggregate demand will lead to higher inflation but a policy that counteracts inflation by reducing aggregate demand will deepen the output slump.To return aggregate demand to its original level, government has used bailouts and tax returns. Funds flow into government through taxes and government borrowing. Tax revenue: corporate profit, personal income, social insurance etc.Government spending: health care, social security, national defense etc.Welfare: health care, food stamps, childcare, unemployment etc.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Excise taxes: taxes on things not “embraced” by society such as gambling, alcohol, and marijuana.Fiscal policy: used to shift aggregate demand using tax rates, government transfers and adjusting government spending levelsExpansionary fiscal policy: government buying goods, cut in taxes, increase in transfers – can close a recessionary gapContractionary fiscal policy: reduced government spending, increased taxes, fewer government transfers – can reduce the inflationary gapFiscal policy is not automatic, there are significant lags in its use.The following all take time:-Government developing a plan-Negotiation of government spending (increase or decrease)-Implementation of the plan -Realization of the gapFiscal policy has a multiplier effect on the economyExpansionary fiscal policy leads to an increase in real GDP larger than the initial rise in aggregate spending caused by the policy.Ex:MPC=0.7M=1/1-0.7 = 1/0.3 =3.33If government spends $500 they are actually putting in $1665 because 3.33(500)=1665If government spends too much (throwing money at the problem) they can create too much inflation. The affect of government spending depends on how much people are