Demonstrate how a permanent fiscal expansion will not increase output in the long run.

Chako

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8 years ago

Demonstrate how a permanent fiscal expansion will not increase output in the long run.

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International Economics: Theory and Policy

Edition: 10^th

Author: Krugman

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machukian

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8 years ago

(1 )   E on Y-axis, Y on X-axis
(2 )   DD shifts right
(3 )   temporary equilibrium where E lower and Y increased
(4 )   permanent increase in demand caused by increase in G causes currency to appreciate: AA shifts left
(5 )   therefore Y returns to original levels, E decreases even more
RESULT of permanent fiscal expansion: currency appreciation, output does not change. This effect is called "crowding out."

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Chako Author

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8 years ago

Good answer, thank you

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machukian

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8 years ago

Good luck

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