[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Aggregate
demandinflation
curves
Potential
output
INFLATION (π)
E 2
E 0
Inflation
adjustment
line
E 1
OUTPUT (Y )
Figure 33.1
AUTOMATIC STABILIZERS
Automatic stabilizers affect the slope of the ADI curve and how it shifts in response to
disturbances in spending. The light green ADI curve depicts an economy with stronger
automatic stabilizers; the dark green ADI curve, one with weaker. When a spending
shock shifts both to the left from the same starting point E 0 , the light green ADI curve
moves less as the automatic stabilizers dampen the impact of the shock. As a result,
output and inflation fluctuate less (compare the short-run equilibria at E 1 and E 2 ). In the
face of an inflation shock, stronger automatic stabilizers lessen the fluctuation of output.
figure, the smaller shift in the light green ADI curve reduces the fall in equilibrium
output, increasing the economy’s stability. In the face of inflation shocks, automatic
stabilizers lead to smaller fluctuations in real output.
DISCRETIONARY POLICY ACTIONS
Fiscal policy has also been used to affect the economy deliberately rather than automatically.
Discretionary policy actions represent conscious choices by the government.
When we analyzed the impact of an increase in government purchases in the
full-employment model of Part Six or discussed how a tax cut would shift the ADI
curve, we were analyzing discretionary policy changes.
Fiscal policy has been used actively to help promote macroeconomic goals several
times in recent history. Perhaps the most famous case was the 1964 Kennedy
tax cut, which was designed to boost economic growth and reduce unemployment.
The analysis in Chapter 30 explained why this policy succeeded in the short run but
led to higher inflation in the long run. The late 1960s also saw an increase in government
purchases associated with the Vietnam War, which contributed to an
expanding economy and rising inflation (just what a rightward shift of the ADI curve
FISCAL POLICY ∂ 731