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In this chapter, you will: Learn about expansionary and contractionary fiscal policies, which are used by governments seeking economic stability; analyze the multiplier effect of fiscal policy, as determined by the marginal propensities to consumer and withdraw; consider budget surpluses and deficits and their impact on public debt and public debt charges. | Understanding Economics Chapter 12 Fiscal Policy Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. 2nd edition by Mark Lovewell and Khoa Nguyen Chapter Focus In this chapter, you will: learn about expansionary and contractionary fiscal policies, which are used by governments seeking economic stability analyze the multiplier effect of fiscal policy, as determined by the marginal propensities to consumer and withdraw consider budget surpluses and deficits and their impact on public debt and public debt charges Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. * Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Stabilization Policies (a) Stabilization policy is government policy designed to lessen the effects of the business cycle can be either expansionary or contractionary expansionary policy attempts to reduce unemployment and stimulate output contractionary policy attempts to stabilize prices and reduce output * . | Understanding Economics Chapter 12 Fiscal Policy Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. 2nd edition by Mark Lovewell and Khoa Nguyen Chapter Focus In this chapter, you will: learn about expansionary and contractionary fiscal policies, which are used by governments seeking economic stability analyze the multiplier effect of fiscal policy, as determined by the marginal propensities to consumer and withdraw consider budget surpluses and deficits and their impact on public debt and public debt charges Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. * Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Stabilization Policies (a) Stabilization policy is government policy designed to lessen the effects of the business cycle can be either expansionary or contractionary expansionary policy attempts to reduce unemployment and stimulate output contractionary policy attempts to stabilize prices and reduce output * Stabilization Policy and the Business Cycle Figure 12.1, Page 289 CONTRACTION EXPANSION Peak Trough Long-Run Trend of Potential Output Without stabilization policy With stabilization policy Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Real GDP Time * Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Stabilization Policies (b) Stabilization policy can take the form of either fiscal policy or monetary policy fiscal policy uses taxes and government purchases expansionary fiscal policy involves more government purchases and/or lower taxes to shift AD rightward contractionary fiscal policy involves fewer government purchases and/or increased taxes to shift AD leftward monetary policy uses interest rates and the money supply * Expansionary Fiscal Policy Figure 12.2, page 290 AS AD0 AD1 b a Potential Output Initial Recessionary Gap Real GDP (1992 $ billions) 800 780 0 170 160 Price Level (GDP deflator, 1992 = 100) Copyright © 2002 by McGraw-Hill Ryerson .
