ThinkEconomics
Go to the Introduction
Go to Changes in Supply, Demand and Market Equilibrium
Go to A Firm's Long Run Average Cost Curve
Go to Profit Maximization for a Competitive Firm
Go to Market Equilibrium in the Long Run
Go to The Aggregate Demand and Aggregate Supply Model
Go to Macroeconomic Phenomena in the AD/AS Model
Go to Economic Policy Tools

Economic Policy Tools

Remark To achieve the economic goals of low unemployment and stable prices, the Congress and the President can use two fiscal policy instruments, government spending and taxation to affect real GDP and the price level. In addition, the Federal Reserve can use three monetary policy instruments, open market operations and changes in the discount rate and required reserve ratio to change real GDP and the price level.
   
Claim   An increase in government spending G or a decrease in autonomous taxes, ceteris paribus, increase aggregate demand, thereby increasing both the equilibrium level of real GDP, Q*, and the equilibrium price level P*. Alternatively, a decrease in government spending G or an increase in autonomous taxes, ceteris paribus, decrease aggregate demand, thereby decreasing both the equilibrium level of real GDP, Q*, and the equilibrium price level P*.
   
Claim   A Federal Reserve (Fed) open market purchase of U.S. securities, a decrease in the discount rate or a decrease in the required reserve ratio increase the money supply, thereby increasing aggregate demand and the equilibrium level of real GDP, Q*, and the equilibrium price level, P*. Alternatively, a Fed open market sale of U.S. securities, an increase in the discount rate or an increase in the required reserve ratio decrease the money supply, thereby decreasing aggregate demand and the equilibrium level of real GDP, Q*, and the equilibrium price level, P*.
   
Interactive Graph