What Is Meant by GDP and How Is It Measured
Fiscal policy is an effort by the government to stimulate the economy by adjusting and monitoring the level of spending. It refers to government purchases, transfer payments, taxes, and borrowing as they affect macroeconomic variables such as real GDP, employment, the price level, and economic growth. Using the income-expenditure model, we will focus on the demand side to consider the effect of changes in government purchases, transfer payments, and taxes on real GDP demanded. The short story is that at any given price level, an increase in government purchases or in transfer payments increases real GDP demanded, and an increase in net taxes decreases real GDP demanded, other things remain constant.4) Give short definitions of both the IS and LM curves and briefly explain how this model can help economists understand the interaction between the goods and money markets. Show how the IS and LM curves can be derived and explain how equilibrium is reached.The IS curve describes the combination of interest rates and output that clear the goods and services market in the short run. The goods and services market is said to clear when spending by consumers, firms, the government (and foreigners if an open economy) on goods and services equals the production of goods and services. The basic equation for the IS curve in a closed economy is closely related to the national income accounting identity Y = C+I+G, where Y is GDPThe LM curve summarizes all the combinations of income and interest rates that equate money demand and money supply. The LM curve in conjunction with the IS curve will help pin down the interest rate in the economy. It is well known that establishing the elasticity of the IS and LM curves provides basic information about the predicted outcome of fiscal and monetary policies in a given model, with a combination of inelastic LM and elastic IS implying fiscal crowding out and potent monetary policy, whereas elastic LM and inelastic IS lead to potent fiscal and weak monetary effects.