Why would the government want to tighten fiscal policy? To reduce GDP? Why on earth would you want to reduce national output?! That's not even slowing growth - that's putting the economy into a recession. The economy would be shrinking. Unemployment would be soaringOkay... so with growth there's inflation so... shrinking the economy would get rid
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But ummmm, I thought that a contractionary policy meant that the OCR would be increased, so bank interest rates would increase, so inflation would decrease. Am I wrong?
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Fiscal policy is concerned with government spending and taxation. So contractionary fiscal policy would reduce aggregate demand (AD) and reduce inflation that way.
And I just answered the question, except the model I've gotta use (Investment-Savings Liquidity Model if you're interested - not in NCEA thank Gawd) says interest rates would decrease. Guess that's an after effect to the reduced inflation.
Blah. Long reply. Sorry.
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The Investment-Savings Liquidity Model sounds lovely. I think I am maybe going to avoid taking economics papers at university.
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