Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download Chapter19_20_Fiscal Policy and Multiplier
Document related concepts
Transcript
Interactive Examples Fiscal Policy and the Multiplier Begin To navigate, please click the appropriate green buttons. (Do not use the arrows on your keyboard) Material from this presentation can be found in: Chapter 19 Chapter 20 Slides By David Gillette and Kevin Brady Interactive Examples Fiscal Policy and the Multiplier An economy is in long-run equilibrium when the aggregate demand curve (AD), short-run aggregate supply curve (SRAS), and long-run aggregate supply curve (LRAS) intersect at the same price level and output level. Price Level (P) LRAS SRAS Question 1: Suppose consumers suddenly cut back on spending. What happens in the economy? Pe AD Qf Aggregate Output (Q) Answer Interactive Examples Fiscal Policy and the Multiplier Question 1: Suppose consumers suddenly cut back on spending. What happens in the economy? Next LRAS Price Level (P) Answer to Question 1: SRAS When consumers reduce spending, the AD curve shifts down and to the left. This results in a short-run equilibrium at a lower output level (Q1) and a lower price level (P1). Pe P1 AD Q1 Qf Aggregate Output (Q) Interactive Examples Fiscal Policy and the Multiplier Question 2: Suppose a new discovery of raw materials lowers input prices throughout the economy. What happens in the economy? Price Level (P) LRAS SRAS Pe AD Qf Aggregate Output (Q) Answer Interactive Examples Fiscal Policy and the Multiplier Question 2: Suppose a new discovery of raw materials lowers input prices throughout the economy. What happens in the economy? Next Price Level (P) LRAS SRAS Answer to Question 2: When input prices decline, the SRAS curve shifts down and to the right. This results in a short-run equilibrium at a higher output level (Q1) and a lower price level (P1). Pe P1 AD Qf Q1 Aggregate Output (Q) Interactive Examples Fiscal Policy and the Multiplier In the previous two examples, the economy started at long-run equilibrium. Let’s examine a situation where the economy is below its long-run equilibrium output level, at Q1. LRAS Price Level (P) Question 3: The government realizes the economy is operating below equilibrium and decides to implement a stimulus package that includes spending on infrastructure. What effect will this have on our model? SRAS Pe P1 AD Q1 Qf Aggregate Output (Q) Answer Interactive Examples Fiscal Policy and the Multiplier In the previous two examples, the economy started at long-run equilibrium. Let’s examine a situation where the economy is below its long-run equilibrium output level. Next LRAS Price Level (P) Question 3: The government realizes the economy is operating below equilibrium and decides to implement a stimulus package that includes spending on infrastructure. What effect will this have on our model? Answer to Question 3: SRAS Pe P1 When the government spends, the AD curve shifts up and to the right. In this graph, the result is a return to the longrun equilibrium at Qf and Pe. AD Q1 Qf Aggregate Output (Q) Interactive Examples Fiscal Policy and the Multiplier In the previous three examples, we looked at the short-run implications of various shocks and government policies. Let’s examine what happens in the long run. LRAS Price Level (P) The graph to the right shows our economy operating below the long-run equilibrium. Let’s assume we are $1 billion below equilibrium output at Q1, the spending multiplier is 2, and Congress passes a $1 billion dollar stimulus package. Question 4: What would happen in our model? SRAS Pe P1 AD Q1 Qf Aggregate Output (Q) Answer Interactive Examples Fiscal Policy and the Multiplier In the previous three examples, we looked at the short-run implications of various shocks and government policies. Let’s examine what happens in the long-run. The graph to the right shows our economy operating below the long-run equilibrium. Let’s assume we are $1 billion below equilibrium output at Q1, the spending multiplier is 2, and Congress passes a $1 billion dollar stimulus package. LRAS Price Level (P) Question 4: SRAS P3 What would happen in our model? Answer to Question 4: P2 Despite the government’s good intentions, they failed to take into account the effect of the spending multiplier, and so the AD curve shifts past the point where long-run equilibrium would have been, all the way to Q2 and P2. The higher level of output is only temporary, however, as workers and suppliers adjust their expectations to the higher price level of P2. This causes the SRAS curve to shift up and to the left. Prices rise further until workers adjust their inflationary expectations and a new long-run equilibrium is reached at Qf and P3. The End Pe P1 AD Q1 Qf Q2 Aggregate Output (Q)
