Understanding Fiscal Contracts and Economic Impact

Fiscal Contract

= C+Output baj IS no camb cdo baja i Islm, baja Ms= sube i+no inicial en Y I spending dpnd en i. aument G=baja I Cambios Ms no afect price level short run LM comb i+Y mantien eq n financ mrk. Reduct consumr confidnc=left shift is curv I spending dpnd output= baja i Aggregate supply relation, current Plevel dpnd expectd pric level Fixed IS curve: baj i sube I CB=opn mkt purchase bonds=lm abajo Real supply=stock € medid n bns,no $ ISLM,baja G, baja gradual i+Y AS: baj output,baja unemployment,baja nominl wage,baja P. I no dpnd i =baja Ms no camb output CB compr bons y aument T y baja i Xpansionry: sube Pbons baja i Aument (c), ppcion € persns quiern en moned baja money multiplier Contract: bajn bons,sub i CB open market sale bonds:baja H sube Ms=baja ratio sube aggregate demand,baja P,sube output xlo i sube P level=arriba LM sube i bons,baj income,sube su P baja i sube income,baja i baja I cdo CB compr bons (0i) Md curve giro izq cdo baje income Ms>Md:sube €Pb Chekable deposits liabilities banks Sube T= sube I medium run Short run=sube nominal wage Medium run=fiscal,no employment Si baja c=sube multip Cb compr bons subir Ms Supply real gdp function ctidads d labor,k,stado tecnolog Ctidad real gdp ofertad a dif nivels d P reflej aggregate supply curv Long-run:real gdp equals potential gdp Short run:companies produc mor output while sube P Cdo sube P ctidad real gdp cte Aggregate demand curv es – xq ls pers comprn mens bns y ahorrn mas cdo subn los P xq su riquez baj Cdo ls P subn y ls foreign goods prices cte, baja X Bajada future income baja aggregate demand Si sube T curv AD izq y aggregt demand baj Sube reserve ratio=upward shift lm curve Is curve:combint output+is good markt eq CB vnde bons y sube T baja Y Economy oper curv lm:diner+bons dl mdo en eq y ls good mrkt no Baja G:leftward shift IS curv Investment spend not sensit to i:IS steep Sub P:upward shift LM curv Sub T:IS curv mueve y eco a lo larg LM Decrease real money supply upward left Lower real income decres demand for money and a lower price lever increase Liability banks:demand deposit Increase real xchang rate higher imports Under fixed xchang rate monetary policy no effect Increase foreign demand=improvmnt trad balance Reduct government spending:leftward is curve CB open mkt purchase bnds lm down