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Economics1
Economics

Student ID: B10016191
Name: Lee Sun Seok 李淳碩 (Tim)

Q1. How does the government use the fiscal policy and monetary policy to stabilize the economy?
◆ According to the basic Keynesian model inadequate spending is an important cause of recessions. To fight recessions- at least, those caused by insufficient demand rather than slow growth of potential output- policymakers must find ways to stimulate planned spending. Policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps, are called stabilization policies. Policy actions intended to increase planned spending and output are called expansionary policies: expansionary policy actions are normally taken when the economy is in recession. Contractionary policies are policies actions intended to reduce planned spending and output. The two major tools of stabilization policy are monetary policy and fiscal policy. -P651
For example, an increase in government purchases raises autonomous expenditure directly, so it can be used to reduce or eliminate a recessionary gap, Similarly, a cut in taxes or an increase in transfer payments increases the public 's disposable income, raising consumption spending at each level of output by an amount equal to the marginal propensity to consume times the cut in taxes or increase in transfers. Higher consumer spending, in turn, raises short-run equilibrium output.
-Fiscal policy
1. Government purchases and planned spending -P651
An increase in the government 's purchases eliminates a recessionary gap
Figure 23.6 P652 Planned aggregate expenditure PAE
Planned aggregate expenditure PAE
PAE (Planned aggregate expenditure
PAE (Planned aggregate expenditure | 1. Recessionary Gap
1. Recessionary Gap
F
F
Expenditure Line
PAE= 950+ 0.8Y

Expenditure Line
PAE= 950+ 0.8Y

Expenditure Line
PAE= 960+ 0.8Y

Expenditure Line
PAE= 960+ 0.8Y

Y=PAE
Y=PAE
E
E
950
950
960
960
| | 4,750
4,750
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