11 - AGGREGATE SUPPLY, FISCAL POLICY, AND STABILIZATION

Abstract

This chapter discusses aggregate supply, fiscal policy, and stabilization. The three major determinants of aggregate supply are (1) the quantity (and quality) of resources used in the production process, (2) the efficiency with which the applied resources are used, and (3) the current state of production technology. Other things constant, as the quantity (and quality) of resources contributing to the production process expands, aggregate supply will increase. But resources are scarce. At any point in time, the size of the economy's resource base will constrain aggregate supply. With the passage of time, the economy's resource base will change. Potentially productive resources will not enhance aggregate supply unless they actually become engaged in the productive process. Just as physical resource scarcity limits the economy's resource base, so, too, do human-imposed restrictions and individual decisions that reduce the effective availability of resources. Once aggregate supply constrains an economy, it is important to consider both the demand and supply effects of fiscal policy.