Government and Fiscal Policy

Read this chapter to learn about how the government's fiscal actions influence aggregate demand. The chapter first introduces the components of the government's budget and then discusses discretionary fiscal policy and automatic stabilizers used to influence the economy. Some lags in the implementation of fiscal policy are identified and the concept of crowding out is introduced. Attempt the "Try It" exercises at the end of the section.

2. The Use of Fiscal Policy to Stabilize the Economy

Answer To Try It Problem

Fiscal policies that could be used to close an inflationary gap include reductions in government purchases and transfer payments and increases in taxes. As shown in Panel (b) of Figure 12.8 "Expansionary and Contractionary Fiscal Policies to Shift Aggregate Demand", the goal would be to shift the aggregate demand curve to the left so that it will intersect the short-run aggregate supply curve at YP.