Foundations of Economics, 8th Edition

32.3 The Supply Side: Potential GDP and Growth

MyEconLab Concept Video

You’ve seen how fiscal policy can influence the output gap by changing aggregate demand and real GDP relative to potential GDP. But fiscal policy also influences potential GDP and the growth rate of potential GDP. These influences on potential GDP and economic growth arise because the government provides public goods and services that increase productivity and because taxes change the incentives that people face. These influences, called supply-side effects, operate more slowly than the demand-side effects emphasized by Keynesians. Supply-side ­effects are often ignored in times of recession when the focus is on fiscal stimulus and restoring full employment. But in the long ...