Macro Econs about Expansionary :: Fiscal Policy.
1. Firstly, you must understand that in fiscal policy, you are about moving the tax or the government spending, as it’s the component of the IS’s curve (Go,To). yes… lets assume the question is telling you that the Government spending is goes up, and the also goes up. As we know, the government spending goes up will lead to the change in IS curve, which will shift the IS curve to the right. 虽然 increase in tax will make the IS curve is going to shift left, but, as we assume the change in Gov spending is the same as the change in tax rate. so it’ll end up to shift right. (delta gov > delta tax)
2.Secondly, as the IS curve will causing output to raise (increase in demand for good and services at the point y1), then it’ll affect the AD curve below. (which component is also Go, To, and Mo). therefore, as AD curve shift to the right, the price will also increase from P0 to P1. and when the price increase to P1, as we know, price level will increase in response, a fall in supply of liquid assets (Mo). then the affect of change in liquid assets will lead the LM curve (Mo, Po) to shift abit to left. (Mo,P1). now, this is when the keynesian stops. (Fixed labour and output).
3.Thirdly, when we’re looking through the classical economy, the point B mention up there will still be moving until it’s new equilibrium at C. i told u why. when the AD curve shifts to the right, told u before that the price will goes up yes? ya.. thats it. the price goes up, and the real wage will goes down. also instead, increased output from Yo to Y1 also have some effects to economy. :: which is : increased output will lead to excess demand of labour. the company will need as much as labour. then unemployment is decreased. when the price is going up, the Real wage (Wo/Po) is higher that (Wo/P1). so the labour will negotiate with the company owner, then the real wage is going up. when the money wage goes up short run aggregate supply shifts to the left, causeing price levels to increase More! further. so, as the result, economy is restored to its original place (Yo) (classical view) final result will be : there’s no output changes, price and the interest rate is going up, of course, investment goes down. the real wage is not change. (althou the price is going up.)
Ok.. shall we move to the next step? as we go further, let me remind you just once more… that the most important thing, you should know about econs is… : it’s sucks. ok?? ok we”lll continue on.
Macro econs about Expansionary :: Monetary Policy.
1. Monetary policy is about to moving the LM curve (the component is : Ms a.k.a money supply, and price.) yes lets assume the government is broke and he’s borrowing from the central bank. the bank is so pissed off then he’ll follow the gov’s order. as the result, the money supply that spread through the country is increasing (LM curve shifts right), will lead to increase price (AD curve also move upward.
2. The increase in price will shift the LM curve to the left. As a result, LM shifts to LM1 and Ad at point A shifts to point B. the real wage (Wo/P1) is lower than (W1/P1). therefore, at the next negotiation, workers will negotiate to have a higher money wage, as money wage increases, SAS shifts to SAS1. it causes price to increase More Further. to P2. The increase in price will make the Lm curve shift again to LM2.
the final result is : output hasn’t changed as well as the real wage. however money suppy and price has been changed.
This is the Expansionary of both policies that i mention. dont forget that actually, there’s 4 models, 2 expand, 2 contra. ok guys.. i think im fu**in tired to write this explanation. as well as my english is not so much improved, i think i’ll rather write my blog with chinese words.. thanks … =9
eXeQzaLie 