5.1 Fiscal and Monetary Policies Short Run

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8 Terms

1
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Recessionary Gap

FISCAL is best

2
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Inflationary Gap

MONETARY is best

3
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Recessionary Gap: No Policy

  1. Wages decrease = Input Costs decrease = SRAS →

4
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Recessionary Gap: Fiscal

  1. Gov Spending increase = AD →

  2. Taxes decrease = Disposable income increase = Consumer Sp increase = AD →

5
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Recessionary Gap: Monetary

  1. Limited Reserves

    • RR decr OR Disc decr OR OMO buy bonds = MS increase = ir decrease = Investment increase = AD→

  2. Ample

    • IOR decrease

    • Lowers incentive for banks to keep reserves, so they loan it out

6
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Inflationary Gap: No policy

  1. Wages increase = Input costs increase = SRAS ←

Stagflation!

7
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Inflationary Gap: Fiscal

  1. Gov sp decrease = AD ←

  2. Taxes increase = Disposable income decrease = C decrease = AD ←

8
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Inflationary Gap: Monetary

  1. Limited

    • RR increase OR Disc increase OR OMO sell bonds = MS decrease = ir increase = Investment decrease = AD ←

  2. Ample

    • IOR increase

    • Increase incentive for banks to keep reserves, so they loan out less