Fiscal Policy

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Fiscal Policy

  1. 1. FISCAL POLICY 12 C H A P T E R
  2. 2. "Do not ask what your govenment can do for you... but what your government can do for the economy"
  3. 3. Expansionary Fiscal Policy <ul><li>To Reduce Unemployment… </li></ul><ul><li>Increase Government Spending </li></ul><ul><li>Tax Reductions </li></ul><ul><li>Combo of the Two </li></ul>
  4. 4. Price level Real GDP (billions) EXPANSIONARY FISCAL POLICY Full $20 billion increase in aggregate demand AD 1 AD 2 $5 billion initial increase in spending the multiplier at work... P 1 $490 $510 AS
  5. 5. <ul><li>To Reduce Inflation… </li></ul><ul><li>Decrease Government Spending </li></ul><ul><li>Tax Increases </li></ul><ul><li>Combo of the Two </li></ul>FISCAL POLICY AND THE AD-AS MODEL Contractionary Fiscal Policy
  6. 6. Price level Real GDP (billions) CONTRACTIONARY FISCAL POLICY Full $20 billion decrease in aggregate demand AD 4 AD 3 $5 billion initial decrease in spending the multiplier at work... P 2 $510 $522 AS P 1
  7. 7. BUILT-IN STABILITY GDP 1 GDP 2 GDP 3 Real Domestic Output, GDP Government Expenditures, G, and Tax Revenues, T Deficit Surplus T G
  8. 8. BUILT-IN STABILITY <ul><li>Tax Progressivity </li></ul><ul><li>Progressive Tax System </li></ul><ul><li>Proportional Tax System </li></ul><ul><li>Regressive Tax System </li></ul>The more progressive the tax system, the greater the economy’s built-in stability.
  9. 9. EVALUATING FISCAL POLICY Full-Employment Budget Cyclical Deficit Recent U.S. Deficits & Surpluses Year Actual Deficit or Surplus Full-Employment Deficit or Surplus 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 -3.9% -4.5% -4.7% -3.9% -2.9% -2.2% -1.4% -0.3% +0.8% +1.4% +2.4% +1.3% -1.5% -2.1% -2.4% -2.9% -2.8% -2.1% -2.0% -1.3% -0.9% -0.4% +0.3% +1.1% +0.8% -1.5%
  10. 10. FISCAL POLICY, AGGREGATE SUPPLY AND INFLATION Fiscal Policy: No Complications Price level Real GDP (billions) AD 1 AD 2 P 1 $490 $510 AS
  11. 11. FISCAL POLICY, AGGREGATE SUPPLY AND INFLATION Fiscal Policy: Showing Crowding-out Effect or Net Export Effect Price level Real GDP (billions) AD 1 AD 2 P 1 $490 $510 AS AD’ 2 $504

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