Elasticity and Demand - Fiscal Policy Activism

Every college student knows that there's one thing that improves semester grades and the overall GPA: Study more. The problem is not in what to do, broadly speaking, but in the details. Some say that making a study schedule helps but it's the details of keeping to it that's the problem. Some recommend attending classes regularly and taking good notes but it's the finer points about doing it like when the course itself or the instructor appear less entertaining than other fun things going on around campus. Others suggest going to the library more often and cutting down the chit-chatting around campus but it's the minutia of how to defeat your desire to escape studying using others as the excuse that's problematic. One unrealistic professor suggests dumping distracting relationships, associations, commitments, and time killers--TV, cable, email, cell phones, weekend travels and trips home, movies, and parties; but he forgot that beating any addiction is not easy--TV, movies, cell phones, internet, etc. Hopefully, you get the point that a simple policy statement as "study more" might be very difficult to map out and implement. The same applies to the policy decisions of the president and the congress to help the economy achieve the three desirable macroeconomic goals (full employment, price stability and economic growth).

Fiscal Policy Activism

Speaking of the economy, Kenny has an example of what he believes fiscal policy authorities, that is, the president and the congress, should do. For example, when his junky used car was dying off while he was on the highway, he took his legs off the brakes and gave it more gas; but when it started overheating, he cut back on the gas and put his step on the brakes. He went back and forth doing this until he made it home. That is to say, when there's a recessionary gap pursue expansionary fiscal policies (expand aggregate demand), and when there is an inflationary gap, pursue contractionary fiscal policies (contract aggregate demand). Simply, he saying that the president and congress (fiscal policy authorities) should cut taxes and spend more to fight recessions (expand aggregate demand, i.e., implement expansionary fiscal policies). His rationale why it will work is this:

Cut taxesdisposable income (I) riseconsumption spending(C) rise AD increase