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Week 7 · Module overview

Week 7 — Fiscal Policy

Principles of Macroeconomics Free sample edition

Why this matters

A construction worker waiting on a road project and a nursing student reading a headline about the national debt both meet this week's ideas.

In plain language

This week is about fiscal policy (a government's choices about how much to spend and how much to tax), one of the two big levers it can pull when the economy stalls or overheats. When a government spends a dollar, that dollar becomes someone's paycheck, and part of the paycheck gets spent again. So the first dollar can grow into several dollars of output, and the spending multiplier (the number that says how many dollars of output one new dollar of spending creates) measures that chain. A government that spends more than it collects runs a budget deficit (the shortfall in one year), and every deficit adds to the national debt (the total still owed). Economists agree on that arithmetic, and they argue hard about when the government should use this lever, so you will hear both sides at full strength.

  • Already covered: Week 5 drew the AD–AS diagram, and Week 6 read a recession as a gap from potential output.
  • This week: fiscal policy, the spending and tax multipliers, automatic stabilizers, and the deficit and the debt.
  • How they connect: government spending is part of aggregate demand, so it can shift the curve and close a gap.
  • Where we're going next: Week 8, Midterm Review & Exam, gathers Weeks 1 to 7.

Focus

Can a government spend its way out of a downturn, and what does the debt have to do with it?

By the end of this module, you should be able to:

  • [ ] compute the spending and tax multipliers from the MPC
  • [ ] find the change in output from new spending or a tax cut
  • [ ] tell the deficit (a flow) from the debt (a stock)
  • [ ] weigh the case for and against fiscal action fairly

To-do

Plan your week

  1. Read Chapter 7 (45 minutes), then the lecture and slides.
  2. Work the tutorial (60–90 minutes) and practice set (20 minutes).
  3. Do the Model Workshop (90 minutes), discussion, and assignment.
  4. Take the quiz.

This week's checkpoint: at an MPC of 0.8, size a road project of 20 billion dollars.

You've got this

Take it in order, and ask your instructor early.

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