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- use of taxes,
- government transfers, or government purchases of goods and services to shift
- the aggregate demand curve.
- increases aggregate
- demand and
- Close a Recessionary Gap
A Cautionary Note: Lags
in Fiscal Policy
true because it all takes time
multiplier on changes in government purchases
multiplier on changes in taxes or transfers
- MPC/(1 − MPC) and are less effective because part is absorbed into savings
- taxes that don’t
- depend on the taxpayer’s income
- reducing the size of the multiplier and
- automatically reducing the size of fluctuations in the business cycle and include taxes and transfers
cyclically adjusted budget
- separate the effects of the business cycle
- from the effects of discretionary fiscal policy, governments estimate
budget deficit as a
percentage of GDP tends to rise during recessions
budget deficit as a
percentage of GDP moves closely in tandem with the unemployment rate.
- from October 1 to September 30
- consumers and firms
- become more optimistic,
- the real value of
- household assets rises,
- existing stock of
- physical capital is relatively small,
- government increases
- spending or cuts taxes, or
- increases the
- quantity of money
movement along the AD curve
- occurs when a change in the aggregate price
- level changes the purchasing power of consumers’ existing wealth
short-run aggregate supply
curve is upward-sloping
- because nominal wages are sticky in the short
- dollar amount of the wage paid.
- nominal wages that are slow to fall even in
- the face of high unemployment and slow to rise even in the face of labor
- If workers become
- more productive
long-run aggregate supply
- , including nominal wages, were fully
a recessionary gap
- aggregate output is below potential output.
- percentage difference between actual
- aggregate output and potential output.
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