1. Module Economic Policy and the Aggregate Demand- Aggregate Supply Model odel KRUGMAN'S MACROECONOMICS for AP* 20 Margaret Ray and David Anderson

2. What you will learn in this Module : How the AD-AS model is used to formulate macroeconomic policy The rationale for stabilization policy Why fiscal policy is an important tool for managing economic fluctuations Which policies constitute expansionary fiscal policy and which constitute contractionary fiscal policy

3. Self-correction? Stabilization Policy Macroeconomic Policy

4. Policy in the Face of Demand Shocks Negative Demand Shocks/ Positive Demand Shocks Why are they bad? Create GDP Gaps: change in output, change in employment, change in price level. Having price stability is a good thing and a desirable goal. Should policymakers counteract? Yes and No

5. Responding to Supply Shocks Supply shocks : Hard to counter act. Can not easily remedy Policy dilemma: How can you shift the AS curve back? Should you shift the AD curve right instead? Could limit unemployment, but cause even higher inflation

6. Fiscal Policy: The Basics

7. Taxes, Government Purchases of Goods and Services, Transfers, and Borrowing

9. The Government Budget and Total Spending GDP = C + I + G + X - M The effect of taxes and transfers Effects on Investment

10. Expansionary and Contractionary Fiscal Policy Expansionary Fiscal Policy increase G decrease T increase transfers

11. Expansionary and Contractionary Fiscal Policy Contractionary Fiscal Policy decrease G increase T decrease transfers

12. A Cautionary Note: Lags in Fiscal Policy Time lags: 3 Lags in fiscal policy Recognition lag: Government has to realize there is a problem and a GDP gap has happened Decision lag: (Administrative lag): Government must come up with a plan to correct the GDP gap and pass legislation Implementation lag: (Operational lag): Once the policy is approved, the effects take time to change the condition of the economy. ** Lags make decision making more difficult**