ap economics: module 36 terms

what was the main consensus around economic policy during the Great Moderation?

using MP over FP was better for stabilizing the economy; acknowledgment of policy constraints due to NAIRU + the political business cycle

IMPORTANT INFO: 5 main questions about macroeconomic policy + answers from different economic groups

fiscal stimulus

expansionary FP (lower taxes, increase spending)

arguments made by supporters of fiscal stimulus

• MP can’t be used due to liquidity trap

• concerns about an increasing IR won’t happen due to the severity of the economy’s depression

• the economy will be depressed for a while, so concerns about how long this may take are solved

arguments made by opponents of fiscal stimulus

• Ricardian equivalence

• there will be an increasing long-term IR since spending programs lead to reduced faith in the govt.’s ability to repay debts

Ricardian equivalence

individuals and firms see an increase in govt. spending as a sign that taxes will rise in the future, leading to a decrease in private spending

doctrine of “expansionary austerity”

a decrease in govt. spending will increase private-sector confidence, leading to increased output and employment