Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 12 Short Run Macroeconomic Fluctuations
Chapter 34 of 36 The Influence of Monetary and Fiscal Policy on Aggregate Demand
Section 19 of 34
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Regarding fiscal policy we have seen how changes in government taxes and purchases influence the quantity of goods (and services) demanded.
Most economists believe the short-run macroeconomic effects of fiscal policy
work primarily through aggregate demand.
Fiscal policy can also influence the quantity of goods supplied.
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Consider the effects of tax changes on aggregate supply.
One of the Ten Principles of Economics #4 (list below): people respond to incentives.
When government policymakers cut tax rates workers keep more of each dollar they earn so they have a greater incentive to work and produce goods.
When workers respond to this incentive
· the quantity of goods supplied will be greater at each price level
· the aggregate supply curve shifts right
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From Wikipedia:
Supply-side economics is a school of macroeconomics that argues economic growth can be most effectively created by lowering barriers for people to produce and supply goods as well as invest in capital.
Typical policy recommendations of supply-side economists are lower marginal tax rates and less regulation.
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Supply-side [Republican] economists argue tax cuts have a large influence on aggregate supply.
The influence is so large a cut in tax rates will stimulate enough additional production and income that tax revenue will actually increase.
Many [Democrat] economists do not consider this the normal case.
They say production and income may increase but will not generate enough tax revenues to match or exceed revenues lost by the tax cut.
Supply-siders counter by saying a tax cut will reduce tax revenues in the short-run but increase them in the long-run, easily making up for the lost short-run tax revenues.
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Changes in government purchases, like changes in taxes, can also affect aggregate supply.
Suppose the government increases expenditure on roads.
Roads are used by private businesses to receive supplies and make deliveries to their customers.
This means an increase in the quantity and quality of roads increases businesses' productivity, sales, and profits.
So, when the government spends more on roads it increases the quantity of goods supplied at any given price level, shifting the aggregate-supply curve to the right.
Both a tax cut and road building have more effect in the long run than the short run.
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The ten principles of Economics:
1: people face trade-offs
2: the cost of something is what you give up to get it
3: rational people think at the margin
4: PEOPLE RESPOND TO INCENTIVES
5: trade can make everyone better off
6: markets are usually a good way to organize economic activity
7: governments can sometimes improve market outcomes
8: a country's standard of living depends on its ability to produce goods and services
9: prices rise when the government issues too much money
10: society faces a short-run trade-off between inflation and unemployment
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most economists do not consider this the normal case
hotondo no keizai gakusha wa kore ga tsūjō no kēsudearu to wa kangaete imasen
ほとんどの経済学者はこれが通常のケースであるとは考えていません
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