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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. |
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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*. |
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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 decreaseing aggregate demand and the
equilibrium level of real GDP, Q*, and the equilibrium price level, P*. |
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