ECON 102 Lecture Notes - Lecture 15: Procyclical And Countercyclical, Fiscal Policy, Output Gap
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ECON 102 Full Course Notes
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Lecture 15: fiscal policy: countercyclical policy, countercyclical policy engages in manipulation that pushes against the tendency of the economy: expansionary in bad times, contractionary in good times. Want cyclical policy to work in opposite/counter direction. Like if upturn, then shrink economy a little. First, we"ll make two (very strong!) assumptions: we know exactly when shocks are coming, how big the shock is, and exactly what ad, Sras, lras look like: we can intervene immediately, and the policy takes full effect immediately. If so, the government is able to completely counteract all fluctuations in output around the lr growth path. It"s not clear that the economy is better off in this situation (see: the 1970s) The keynesian model does not reflect this incentive: a pop culture version of the critique is sometimes pejoritively called supply-side economics . Keynesianism only focuses on ad: the neo-keynesian response: we can work incentives into our models, and we can build tax distortions into our models.
