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The final two chapters look at fiscal
policy (FP). We studied fiscal policy in lesson 12c. There
we learned that if we have high unemployment (UE) the
government can increase government spending (G) or cut taxes
(T) to reduce it. If there is high inflation (IN) then the
federal government can decrease spending or increase taxes
to reduce it.
"HOW MUCH". That is how chapter 10
differs from chapter 12. In chapter 12 we learned that if
government spending (G) increases it will cause an increase
in AD which will cause an increase in output (RDO) and help
reduce UE. But, HOW MUCH will output increase? In chapter 12
we learned that if taxes increase it will cause a decrease
in AD which will cause a decrease in output (RDO) and reduce
IN. But, HOW MUCH will output decrease?
We will learn that if government
spending increases by let's say $10 billion, then real GDP
(RDO) will increase by MUCH MORE than $10. This is called
the "multiplier effect". Sounds like magic, but you will
soon understand why.
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