Module Introduction

This module discussed the AS-AD model and explains the influences on both aggregate supply and aggregate demand. We use aggregate demand and aggregate supply to explain how fluctuations in aggregate demand and/or aggregate supply create the business cycle and inflation cycle, or why economies expand and contract over time. This module also relates the model of aggregate supply and aggregate demand to the three goals of economic policy (growth, unemployment, and inflation), and provides a framework for thinking about many of the connections and tradeoffs between these goals.

This module will also describe the federal budget process and the recent history of revenues, outlays, deficits and debts. Next, using theAS-AD model, we explain the effects of fiscal policy on employment and real GDP. The limitations of fiscal policy are also discussed. ⁽¹⁾