Download Monetary & Fiscal Policy

The Marriage of Fiscal & Monetary
Policy
AP Macroeconomics
http://www.glennbeck.com/content/blog/stu/marriage-equality-for-al/
Where did we come from?
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We discussed the
market for loanable
funds, as well as the
Barro-Ricardo effect.
What is the BarroRicardo effect?
19th Century economist, David Ricardo, after
whom the Barro-Ricardo effect is named.
http://en.wikipedia.org/wiki/Political_economy
The Barro-Ricardo Effect
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An indirect effect of government budget deficits is the
possibility that these deficits will lead to an increase in
private savings and a decrease in consumption that offset
the predicted expansionary fiscal policy.
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Why would this happen? Because people expect that
when the government runs a deficit [the government takes
in less than it puts out] it will increase taxes in order to
repay the money being borrowed. Thus, people (possibly)
save and consume less.
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This is called the Barro-Ricardo effect.
Where are we going?
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This lesson continues to
examine the interaction
between monetary & fiscal
policy, and the impact of
monetary policy on the
following:
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Price level
Output
Unemployment
Interest rates
Investment
http://www.ronedmondson.com/2009/05/his-footprints-in-the-sand.html
The Effects of Policy Changes in Multiple Markets
Let’s say that, in response to the current economic situation, the government decides to increase
its spending without increasing taxes and the Fed keeps the MS constant (w/no Barro-Ricardo
effect). What would happen?
•AD shifts to the right
•Increased demand for loanable funds
•MD also shifts to the right
So what about…?
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Output

Employment

Price level

Interest rates
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Investment
So what about…?
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Output (real GDP): increased. AD increased
because of the increase in government spending.
Employment: increased. AD increased because of
the increase in government spending.
Price level: increased. “ “
Interest rates: increased. With the MS held
constant, the demand for loanable funds
increased, along with the interest rate.
Investment: decreased because of the increase in
the interest rate.
What about crowding-out?
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What could the Fed have done to prevent
crowding out?
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Are there certain conditions when the Fed
should or should not prevent crowding-out?
And now…
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Some resources:
Reffonomics:
http://www.reffonomics.com/
Morton workbook: Activity 45
Works Cited
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Economics of Seinfeld.
http://yadayadayadaecon.com/
Krugman, Paul, and Robin Wells. Krugman’s
Economics for AP. New York: Worth
Publishers.
Morton, John S. and Rae Jean B. Goodman.
Advanced Placement Economics: Teacher
Resource Manual. 3rd ed. New York: National
Council on Economic Education, 2003. Print.
Reffonomics. www.reffonomics.com.