Ad/As Analysis Of The Impact Of Expansionary And Contractionary Fiscal Policy On The Equilibrium Level Of
Economics notes
Ad/As Analysis Of The Impact Of Expansionary And Contractionary Fiscal Policy On The Equilibrium Level Of
➡️ Expansionary fiscal policy is a type of fiscal policy that involves increasing government spending and/or decreasing taxes in order to stimulate economic growth. This type of policy is typically used during periods of economic recession or stagnation in order to boost aggregate demand and increase economic activity.
➡️ Contractionary fiscal policy is a type of fiscal policy that involves decreasing government spending and/or increasing taxes in order to reduce economic growth. This type of policy is typically used during periods of economic expansion in order to reduce inflationary pressures and slow down economic activity.
➡️ Both expansionary and contractionary fiscal policies can be used to achieve a variety of economic objectives, such as reducing unemployment, increasing economic growth, and stabilizing prices. However, it is important to note that these policies can have both positive and negative effects on the economy, and should be used with caution.
How does expansionary fiscal policy affect the equilibrium level of output in an AD/AS analysis?
Expansionary fiscal policy, such as increased government spending or tax cuts, shifts the aggregate demand curve to the right, leading to an increase in the equilibrium level of output. This is because the increase in government spending or the decrease in taxes increases disposable income and consumption, leading to an increase in aggregate demand.
What is the impact of contractionary fiscal policy on the equilibrium level of output in an AD/AS analysis?
Contractionary fiscal policy, such as decreased government spending or tax hikes, shifts the aggregate demand curve to the left, leading to a decrease in the equilibrium level of output. This is because the decrease in government spending or the increase in taxes reduces disposable income and consumption, leading to a decrease in aggregate demand.
Can expansionary fiscal policy lead to inflation in an AD/AS analysis?
Yes, expansionary fiscal policy can lead to inflation in an AD/AS analysis if the increase in aggregate demand exceeds the economy's capacity to produce goods and services. This can lead to upward pressure on prices as demand outstrips supply. However, if the economy is operating below its potential output, expansionary fiscal policy can increase output without causing inflation.