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Impact of Fiscal Policy on Market Dynamics in Short and Long Run

Explore the effects of fiscal policy intervention on market equilibrium in the short run and long run. Understand the changes in interest rates, government spending, and investment to analyze market shifts and equilibrium. Learn how Federal intervention influences the equilibrium price level and output in the economy.

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Impact of Fiscal Policy on Market Dynamics in Short and Long Run

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  1. Example: Perm increase in G, with fed policy intervention (keep P @ Po) Notes: IS and AD moves right, increase in G Y goes up in short term (only by G. I goes down and C stays put) Because r goes up, we “entice” firms to keep producing by increasing P. - shifts LM left, raising r even more - shifts labor supply down Nd Fed Intervention: Bring P back to Po. They accomplish this by taking money out of the economy. (Sell government bonds). This action moves LM further left and AD back to the initial state. Additionally, W/P returns to normal position (W does *not* increase) |ΔI|=|ΔG| The r increase here is the same r increase inexample with no fed intervention. It is the r needed to crowd out investment. Short Run 0 0 0 0 0 0 0 0 Long Run 0 0 0 0 0 0 0 0 0 0 0 0

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