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Mpp#018+fiscal.policy.&.the.multiplier.(12)
Mpp#018+fiscal.policy.&.the.multiplier.(12)
Mpp#018+fiscal.policy.&.the.multiplier.(12)
Mpp#018+fiscal.policy.&.the.multiplier.(12)
Mpp#018+fiscal.policy.&.the.multiplier.(12)
Mpp#018+fiscal.policy.&.the.multiplier.(12)
Mpp#018+fiscal.policy.&.the.multiplier.(12)
Mpp#018+fiscal.policy.&.the.multiplier.(12)
Mpp#018+fiscal.policy.&.the.multiplier.(12)
Mpp#018+fiscal.policy.&.the.multiplier.(12)
Mpp#018+fiscal.policy.&.the.multiplier.(12)
Mpp#018+fiscal.policy.&.the.multiplier.(12)
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Mpp#018+fiscal.policy.&.the.multiplier.(12)

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  • 1. Fiscal Policy &the Expenditure Multiplier tracking MacroEconomic Trends and Statistics and evaluating the impact of government related activities 1
  • 2. Unemployment Seasonally Adjusted Monthly Unemployment Rate, from January 1984 to December 2004Unemployment Rate 10 9 8 7 (%) 6 5 4 3 2 Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja n- n- n- n- n- n- n- n- n- n- n- 8 8 8 9 9 9 9 0 0 9 0 4 8 4 6 8 2 4 6 0 2 0 Month 2
  • 3. Economic Growth Percentage Change in Real Gross Domestic Product (1984-2004) 8Percentage Change 7 6 5 4 3 2 1 0 -1 19 19 19 19 19 19 19 19 20 20 20 92 94 96 98 84 86 88 90 00 02 04 Year 3
  • 4. CPI & PPI Percentage Change in Consumer Price Index (Not Seasonally Adjusted, 1982-84=100) and Implicit Price Deflator (2000=100), 1984-2003 % change in CPI % change in IPDPercentage Change 6.00 5.00 4.00 3.00 2.00 1.00 0.00 1 1 1 1 1 1 1 1 2 2 98 98 98 99 99 99 99 99 00 00 4 6 8 0 2 4 6 8 0 2 Year 4
  • 5. Income DeterminationGDP = C + I + G + (X-M)•CONSUMPTION•INVESTMENT•GOVERNMENT•NET EXPORTS 5
  • 6. Fiscal Policy• Changes in government spending and changes in taxation influence the level of economic activity – Increases in taxes contract the economy – Decreases in taxes stimulate the economy – Increases in government spending will stimulate the economy – Decreases in government spending will contract the economy• together the President and Congress determine fiscal policy 6
  • 7. Government Spending or Taxes? • why do changes in (“G”) government spending levels have greater impact on the economy than changes in (“T”) taxation levels – Government spending is direct – Taxes depend on what consumers do with the tax cut. What they would have done with the money going to support the levels of taxes (how much would they consume or how much would they save of the changing marginal funds) 7
  • 8. Crowding Out• Government increases spending• Government finances the spending by borrowing in credit market• the interest rates go up• the rate and amount of private investment falls• the increase in government spending is offset by a decrease in private investment 8
  • 9. The Expenditure Multiplier• There is a change in spending• The change in spending becomes a change in income for others• Those changes in income become spending• The change in spending becomes a change in income for others• then the same process happens again and again and again……. 9
  • 10. Main Points ~ page i• Three (3) MacroEconomic goals – are: (i) Full employment; (ii) economic growth; and (iii) price stability• Discretionary Fiscal Policy is the use of changes in government spending and taxation rates to influence the level of economic activity 10
  • 11. Main Points ~ page ii• using the Expenditure Multiplier a change in initial spending is multiplied to cause greater changes in spending levels• remember changes in G have more direct and greater impact on spending levels than changes in T 11
  • 12. Main Points ~ page iii• the Government runs a deficit when spending is greater than tax receipts in a given year• the amount of Government Debt is the accumulation of annual deficits• the Crowding Out effect occurs when government spending is financed by private borrowing and raises interest rates thereby crowding out private investment 12

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