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    Expansionary Fiscal Policy: AD and AS Curves

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    During a recession the government usually increases government spending and/or decreases taxes (expansionary fiscal policy). Bush lowered taxes in the 2001 recession and his tax cuts continue. Obama has increased government spending through his stimulus packages. What effect should these expansionary policies have on the AD and AS curves? How should they shift? What should be the impact on GDP, and unemployment as a result of these shifts? (Remember that the equilibrium GDP is determined by the intersection of the AD and AS curves just like the equilibrium output in week 3 was determined by the intersection of the demand and supply curves.)

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    Solution Preview

    There are three measures that have been outlined namely, increase in government spending, decrease in taxes, and tax cuts. The increase in government spending leads to an increase in government spending on goods and services. This shifts the AD curve to the right. Similarly, decrease in taxes/tax cuts is an exogenous decrease in taxes levied. ...

    Solution Summary

    The response provides you a structured explanation of Keynesian economic analysis . It also gives you the relevant references.