ECON 2105 1nd Edition Lecture 16 Current LectureModule 20 Economic Policy and the Aggregate Demand-Aggregate Supply Module I. Stabilization Policy - Use of government policy to reduce the severity of recession and pushing the break when the economy is excessively growing. - Stabilizing what?o Output- employment (priority right now) o Price- inflation- Before talking about the fiscal policies, it is better to look at the government sector in brief.- The source of funding and the outflow of money in the public sector. - Fiscal Policy: The government funds many programs through tax revenues.- Some important terms: o Government transfers: payments by the government to households for which no good or service is provided in return.o Social insurance programs: government programs (transfer payments) intended to protect families against economic hardship.a. Social Securityb. Medicare c. Medicaid- Government purchases: National defense and education are the biggestcategories- Government transfers: social Security, Medicare and Medicaid are the biggest programsThese 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.- - Government budget and total spending - GDP = C + I + G + X – IM- The government directly controls G and indirectly affects C and I.- How? o Household incomes are affected by taxes and transfers, and business investment is affected by taxes and regulations.- So the government can shift the AD curve.- Fiscal policy: the use of taxes, government transfers, or government purchases of goods and services to shift the aggregate demand curve- Expansionary fiscal policy: fiscal policy that increases aggregate demand:o an increase in government purchases of goods and serviceso a cut in taxeso an increase in government transfers- expansionary fiscal policy can close a recessionary gap o Instead of waiting for the long-run correction mechanism, policy makers could choose to stimulate AD and move the economy back toward long-run equilibrium.- Contractionary fiscal policy: fiscal policy that decreases aggregate demand:o a reduction in government purchases of goods and serviceso an increase in taxeso a reduction in government transfers- contractionary fiscal policy breaks the economy - shifts demand lefto Instead of waiting for the long-run correction mechanism, policy makers could choose to contract AD and move the economy back toward long-run equilibrium.- Cautionary Note: Lags in fiscal policy In the case of fiscal policy, there is an important reason for caution: There are significant lags in its use.- It takes time to:o realize the recessionary or inflationary gap by collecting and analyzing economic data.o develop a plan.o implement the action plan (spending the
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