EC140 Lecture Notes - Lecture 9: Output Gap, Potential Output
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Ec140 lecture 9- using fiscal policy & intro to ch 23. Government can use g taxes/transfers to in uence ae and a ect ye. The goal is stabilize the economy and perhaps generate future growth. Opens the possibility that the government can intervene in a macroeconomy when output is not at potential. If recessionary gap (potential output greater than actual), an increase in g and/or reduction in t (taxes) could be used to raise y and return the economy back to potential output. If in ationary gap (potential output less than actual), a decrease in g and/or increase in t could lower y and return the economy to potential. Immediate impact is to increase the government spending component of ae, this shifts the ae curve in a parallel fashion by exactly the same amount as the increase in g. The multiplier means that the initial increase in y induces changes in c that results in further increase in y, etc.