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In the long - run , the economy will eventually trend back to output .

Most macroeconomists believe that the process of self - correction typically takes a or more .

John Maynard once declared , " In the long - run we are all dead . "

Economists usually interpret Keynes as having recommended that governments not wait for the economy to itself .

Many economists argue that the government should use policy to get the economy back to potential output in the aftermath of a shift of the aggregate demand curve .

Stabilization policy is the use of government policy to reduce the of recessions and rein in strong expansions .

A policy that maintains the economy at its original equilibrium is desirable because the temporary fall in aggregate output is associated with high .

Price is generally regarded as a desirable goal , so preventing deflation is a good thing .

Policymakers should not always act to declines in aggregate demand .

Some policy measures to increase aggregate demand , especially those that increase budget , may have long - term costs in terms of lower long - run .

In the real world , policymakers aren't perfectly , and the effects of their policies aren't perfectly .

Policymakers also try to offset shocks to aggregate demand .

Despite more output and lower unemployment , the short - run gains from an inflationary gap must be paid back .

In contrast to the case of a demand shock , there are no easy remedies for a shock .

There are no government policies that can easily the changes in production costs that shift the short - run aggregate supply curve .

If the government acts to increase aggregate demand and limit the rise in unemployment , it reduces the decline in output but causes even more .

If the government acts to reduce aggregate demand , it curbs inflation but causes a further rise in .

Modern governments a great deal of money and collect a lot in .

Funds flow the government in the form of taxes and government borrowing .

Funds flow of the government in the form of government purchases of goods and services and government transfers to households .

In the United States , taxes are collected at the level , the state level , and the local level .

At the federal level , the main taxes are income taxes on both income and profits as well as social insurance taxes .

U . S . government spending takes the form of of goods and services and .

Most U . S . government spending on transfer payments is accounted for by three big programs : , , and Medicaid .

Social Security provides guaranteed income to Americans , disabled Americans , and the surviving spouses and dependent children of deceased beneficiaries .

Medicare covers much of the cost of health care for Americans over age .

Medicaid covers much of the cost of health care for Americans with incomes .

The term social insurance is used to describe government programs that are intended to families against economic hardship .

= C + I + G + ( X - M )

The government controls government purchases of goods and services ( G ) .

Through changes in taxes and transfers , the government also influences spending ( C ) and , in some cases , spending ( I ) .

Either an increase in taxes or a decrease in government transfers reduces disposable , leading to a fall in consumer spending .

Either a decrease in taxes or an increase in government transfers increases disposable , leading to a rise in consumer spending .

Changes in the rules that determine how much a business owes can increase or decrease the to spend on investment goods .

Because the government itself is one source of spending in the economy , and because taxes and transfers can affect spending by consumers and firms , the government can use changes in taxes of government spending to the aggregate demand curve .

Fiscal policy that aggregate demand is called expansionary fiscal policy .

fiscal policy takes the form of an increase in government purchases of goods and services , a cut in taxes , or an increase in government transfers .

Fiscal policy that aggregate demand is called contractionary fiscal policy .

fiscal policy takes the form of a decrease in government purchases of goods and services , an increase in taxes , or a reduction in government transfers .

Many economists caution against an extremely active stabilization policy , arguing that a government that tries too hard to stabilize the economy through fiscal policy can end up making the economy less .

One key reason for caution is that there are important lags in the use of fiscal policy .

It takes time to collect and analyze economic .

It takes months to develop a spending .

It takes time to money .

Because of time lags , an attempt to increase spending to fight a recessionary gap may take so long to get going that the economy has already on its own .

If a recessionary gap turns into an inflationary gap by the time a fiscal policy takes effect , the fiscal policy will make things instead of better .