Fiscal Policy
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Since aggregate demand is made of C + I + G + (X-M), fiscal policy could affect C, I, & G
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Goal: Eliminate Recessionary Gap
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The degree of multiplier would affect the effectiveness of the fiscal policy
2 types of fiscal policy
Goal for Expansionary fiscal policy
Goal for Contractionary fiscal policy
Automatic Stabilizers
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A kind of fiscal policy that designed to reduce the fluctuation within a country’s economic activity and without any actions taken by the government authorities
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However, they couldn’t eliminate the fluctuations, but only to reduce the severity
Indirect effect of fiscal policy on long term economic growth
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Investments from businesses on R&Ds and investment on are factors that can boost long run economic growth. But the prerequisite is to avoid dramatic inflation or deflation. Therefore, Fiscal policies aiming at economic stabilization will kick in, since it could improve economic stability, to reduce fluctuations and to end recessions.
Direct effect of fiscal policy on potential output
Strengths of fiscal policy
Weaknesses of fiscal policy
