All right. So now let's discuss contractionary fiscal policy. This is the opposite of expansionary. So in contractionary fiscal policy, the economy has been booming and we're now experiencing rising inflation. And the government wants to keep this inflation under control. So right now, real GDP is above its potential output. We have overemployment in the economy and increasing price levels. What do I mean by overemployment? Well, it means some people who would generally not be working are now working because there's so much opportunity for work and wages are higher; they're like, "Hey, I actually I'll work right now." Or the fact that workers are working overtime because the firms are producing so much, the economy is booming so much that workers are working more than they generally intend to. So we have overemployment. This is something unsustainable in our economy. So if we go down to the graph here, notice now where our long run aggregate supply is with our short run aggregate supply and aggregate demand. So in this situation, our short run equilibrium is beyond our potential output. How is that possible? Well, like I just said, we have this overemployment in the economy. There's too much happening right now, and it's not sustainable. So this overemployment and this unsustainably high GDP that's beyond our long run potential, well, the government's going to try and tone it back a little bit by decreasing aggregate demand. So, through fiscal policy, what they can do is they can reduce their spending to reduce inflation. So this is going to affect, just like before, it's going to affect the same equation, consumption plus investment plus government spending plus net exports. Again, we're affecting the government purchases here. Okay? And like we just discussed above, they can do, they can affect consumption as well through taxes. Right? The government can also increase taxes which reduces consumption, right? Just like we've been talking about, the higher the taxes are, the lower the disposable income and lower money available for consumption. And we'll see something similar happening on the graph, except now we're going the other way. Since they're reducing their spending, well, we're going to reduce our aggregate demand here, and it's gonna shift to the left, right? We're reducing our government spending. It's going to shift it to the left, and we'll find ourselves at this new aggregate demand where we're back in long run equilibrium. So our first spot right here, our initial short run equilibrium, we were in this place where GDP was too high. GDP was beyond our potential and price levels were high. So we were at this higher price level, and the government wanted to reduce that. So they enacted this policy. And notice what happened. At our new long run equilibrium, we're back at that potential GDP that's sustainable in the long run and the price levels have decreased, right? So this can be similar to expansionary fiscal policy and if you've studied expansionary and contractionary monetary policy, you'll see a lot of similarities with monetary policy and fiscal policy. So if you've done it before, why don't you guys compare those to see the differences and the similarities there? And if not, you'll get to do that once you get to monetary policy. Alright? Let's go ahead and pause here and we'll move on to the next video.
Table of contents
- 1. Introduction to Macroeconomics1h 57m
- 2. Introductory Economic Models59m
- 3. Supply and Demand3h 43m
- Introduction to Supply and Demand10m
- The Basics of Demand7m
- Individual Demand and Market Demand6m
- Shifting Demand44m
- The Basics of Supply3m
- Individual Supply and Market Supply6m
- Shifting Supply28m
- Big Daddy Shift Summary8m
- Supply and Demand Together: Equilibrium, Shortage, and Surplus10m
- Supply and Demand Together: One-sided Shifts22m
- Supply and Demand Together: Both Shift34m
- Supply and Demand: Quantitative Analysis40m
- 4. Elasticity2h 26m
- Percentage Change and Price Elasticity of Demand19m
- Elasticity and the Midpoint Method20m
- Price Elasticity of Demand on a Graph11m
- Determinants of Price Elasticity of Demand6m
- Total Revenue Test13m
- Total Revenue Along a Linear Demand Curve14m
- Income Elasticity of Demand23m
- Cross-Price Elasticity of Demand11m
- Price Elasticity of Supply12m
- Price Elasticity of Supply on a Graph3m
- Elasticity Summary9m
- 5. Consumer and Producer Surplus; Price Ceilings and Price Floors3h 40m
- Consumer Surplus and WIllingness to Pay33m
- Producer Surplus and Willingness to Sell26m
- Economic Surplus and Efficiency18m
- Quantitative Analysis of Consumer and Producer Surplus at Equilibrium28m
- Price Ceilings, Price Floors, and Black Markets38m
- Quantitative Analysis of Price Ceilings and Floors: Finding Points20m
- Quantitative Analysis of Price Ceilings and Floors: Finding Areas54m
- 6. Introduction to Taxes1h 25m
- 7. Externalities1h 3m
- 8. The Types of Goods1h 13m
- 9. International Trade1h 16m
- 10. Introducing Economic Concepts49m
- Introducing Concepts - Business Cycle7m
- Introducing Concepts - Nominal GDP and Real GDP12m
- Introducing Concepts - Unemployment and Inflation3m
- Introducing Concepts - Economic Growth6m
- Introducing Concepts - Savings and Investment5m
- Introducing Concepts - Trade Deficit and Surplus6m
- Introducing Concepts - Monetary Policy and Fiscal Policy7m
- 11. Gross Domestic Product (GDP) and Consumer Price Index (CPI)1h 37m
- Calculating GDP11m
- Detailed Explanation of GDP Components9m
- Value Added Method for Measuring GDP1m
- Nominal GDP and Real GDP22m
- Shortcomings of GDP8m
- Calculating GDP Using the Income Approach10m
- Other Measures of Total Production and Total Income5m
- Consumer Price Index (CPI)13m
- Using CPI to Adjust for Inflation7m
- Problems with the Consumer Price Index (CPI)6m
- 12. Unemployment and Inflation1h 22m
- Labor Force and Unemployment9m
- Types of Unemployment12m
- Labor Unions and Collective Bargaining6m
- Unemployment: Minimum Wage Laws and Efficiency Wages7m
- Unemployment Trends7m
- Nominal Interest, Real Interest, and the Fisher Equation10m
- Nominal Income and Real Income12m
- Who is Affected by Inflation?5m
- Demand-Pull and Cost-Push Inflation6m
- Costs of Inflation: Shoe-leather Costs and Menu Costs4m
- 13. Productivity and Economic Growth1h 17m
- 14. The Financial System1h 37m
- 15. Income and Consumption52m
- 16. Deriving the Aggregate Expenditures Model1h 22m
- 17. Aggregate Demand and Aggregate Supply Analysis1h 18m
- 18. The Monetary System1h 1m
- The Functions of Money; The Kinds of Money8m
- Defining the Money Supply: M1 and M24m
- Required Reserves and the Deposit Multiplier8m
- Introduction to the Federal Reserve8m
- The Federal Reserve and the Money Supply11m
- History of the US Banking System9m
- The Financial Crisis of 2007-2009 (The Great Recession)10m
- 19. Monetary Policy1h 32m
- 20. Fiscal Policy1h 0m
- 21. Revisiting Inflation, Unemployment, and Policy46m
- 22. Balance of Payments30m
- 23. Exchange Rates1h 16m
- Exchange Rates: Introduction14m
- Exchange Rates: Nominal and Real13m
- Exchange Rates: Equilibrium6m
- Exchange Rates: Shifts in Supply and Demand11m
- Exchange Rates and Net Exports6m
- Exchange Rates: Fixed, Flexible, and Managed Float5m
- Exchange Rates: Purchasing Power Parity7m
- The Gold Standard4m
- The Bretton Woods System6m
- 24. Macroeconomic Schools of Thought40m
- 25. Dynamic AD/AS Model35m
- 26. Special Topics11m
20. Fiscal Policy
Expansionary and Contractionary Fiscal Policy
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