Suppose that in elections President Push wanted to help out Congressional candidates in his party by making the economy look strong: high GDP figures and low inflation. Suppose he increased government spending, hoping to make GDP statistics rise in the period prior to the election. He knows this can lead to higher inflation, but he hopes this policy will affect inflation statistics (CPI) mainly after the election is over.
Discuss the short-run and long run implications of the president’s fiscal policy on output, the price level and real interest rate. Use IS-LM & AS-AD graphs, where the short-run aggregate supply assumes that output is some positive function of price surprises.
How does the success of the president’s strategy depend on how flat or steep the short-run aggregate supply curve is? Thinking of our stories of aggregated supply, what are some things that determine the steepness of this curve?