AP Macroeconomics / Unit 5: Long-Run Consequences of Stabilization Policies
5.1 Fiscal and Monetary Policy Actions in the Short Run
Notes
Policies combine to shift AD:
- Recession: expansionary fiscal (more G, tax cuts) and/or expansionary monetary (lower rates).
- Inflation: contractionary fiscal and/or monetary.
Practice
The best combination to fight a severe recession:
Both shift AD right.
Expansionary monetary policy increases AD mainly through:
Interest-sensitive spending.
Fighting inflation, the government could:
Contractionary fiscal.
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