Concepts

What is a fiscal policy?

Conducted by Congress and the President

• They use government purchases, taxes, or transfers to directly influence spending.

What is a monetary policy?

Conducted by The Federal Reserve (the central bank). They control interest rates and borrowing conditions to affect consumer and business spending.

When the government wants to shift Aggregate Demand ($AD$), it pulls three main levers:

1. Government Purchases

2. Household Taxes

3. Government Transfers

What is an expansionary fiscal policy?

Help close a Recessionary Gap (boost output and lower unemployment)

What is an Contractionary Fiscal Policy?

Help close an Inflationary Gap (cool down an overheating economy)

How do you fix a Recessionary Gap?

Start to the left of $LRAS$. Use Expansionary policy ($AD$ shifts right) to push actual output back toward potential output ($Y_p$). Hold $SRAS$ and $LRAS$ fixed

How do you fix a Inflationary Gap?

Start to the right of $LRAS$. Use Contractionary policy ($AD$ shifts left) to pull actual output back down to potential output ($Y_p$). Hold $SRAS$ and $LRAS$ fixed