Ap Eco Chap12 Fiscal Policy

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Ap Eco Chap12 Fiscal Policy

  1. 1. FISCAL POLICY 12 C H A P T E R
  2. 2. LEGISLATIVE MANDATES Employment Act of 1946 Council of Economic Advisors (CEA) Joint Economic Committee (JEC)
  3. 3. FISCAL POLICY AND THE AD-AS MODEL Two Options <ul><li>Discretionary Fiscal Policy </li></ul><ul><li>Non-Discretionary Fiscal Policy </li></ul>Expansionary Fiscal Policy <ul><li>Increase Government Spending </li></ul><ul><li>Tax Reductions </li></ul><ul><li>Combinations of the Two </li></ul>
  4. 4. Price level Real GDP (billions) EXPANSIONARY FISCAL POLICY Full $20 billion increase in aggregate demand AD 2 AD 1 $5 billion initial increase in spending the multiplier at work... P 1 $485 $505
  5. 5. Price level Real GDP (billions) CONTRACTIONARY FISCAL POLICY the multiplier at work... P 3 $515 Full $20 billion decrease in aggregate demand AD 4 AD 3 $5 billion initial decrease in spending P 4
  6. 6. FINANCING OF DEFICITS AND DISPOSING OF SURPLUSES <ul><li>Borrowing vs. New Money </li></ul><ul><ul><li>Borrowing From The Public </li></ul></ul><ul><ul><li>Money Creation </li></ul></ul><ul><li>Debt Retirement vs. Idle Surplus </li></ul><ul><ul><li>Debt Reduction </li></ul></ul><ul><ul><li>Impounding </li></ul></ul>Which Policy Option? G or T?
  7. 7. BUILT-IN STABILITY Net tax revenues vary directly with GDP Transfer payments behave the opposite way as tax collections Automatic or Built-In Stabilizers Economic Importance
  8. 8. BUILT-IN STABILITY GDP 1 GDP 2 GDP 3 Real Domestic Output, GDP Government Expenditures, G, and Tax Revenues, T Deficit Surplus T G
  9. 9. 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
  10. 10. 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 -3.9% -4.5 -4.7 -3.9 -2.9 -2.2 -1.4 -0.3 +0.8 +1.4 +2.4 -2.1% -2.6 -3.0 -2.6 -2.0 -1.9 -1.2 -0.9 -0.4 +0.3 +1.1
  11. 11. FULL-EMPLOYMENT DEFICITS GDP 2 GDP 1 Real Domestic Output, GDP Government Expenditures, G, and Tax Revenues, T (billions) G T 1 Year 1 Year 2 a b c $500 475 450 425 No Change in Fiscal Policy
  12. 12. FULL-EMPLOYMENT DEFICITS GDP 4 GDP 3 Real Domestic Output, GDP Government Expenditures, G, and Tax Revenues, T (billions) T 2 G T 1 Year 3 Year 4 d e f $500 475 450 425 Discretionary Fiscal Policy Tax Decrease h g
  13. 13. -8 -6 -4 -2 0 2 4 Denmark Canada Sweden United Kingdom United States Germany Italy France Czech Republic Hungary Japan GLOBAL PERSPECTIVE BUDGET DEFICITS OR SURPLUSES AS A PERCENTAGE OF GDP, 1999 Source: Organization for Economic Development and Cooperation
  14. 14. PROBLEMS, CRITICISMS, AND COMPLICATIONS <ul><li>Problems of Timing </li></ul><ul><ul><li>Recognition Lag </li></ul></ul><ul><ul><li>Administrative Lag </li></ul></ul><ul><ul><li>Operational Lag </li></ul></ul><ul><li>A Political Business Cycle? </li></ul><ul><ul><li>Offsetting State & Local Finance </li></ul></ul><ul><li>Crowding-Out Effect </li></ul>
  15. 15. FISCAL POLICY, AGGREGATE SUPPLY AND INFLATION Price level Real GDP (billions) AS AD 2 $495 $515 P 1 AD 1 Fiscal Policy: Pure & Simple
  16. 16. FISCAL POLICY, AGGREGATE SUPPLY AND INFLATION Price level Real GDP (billions) AS AD’ 2 $495 $515 P 1 AD 1 Fiscal Policy and the Crowding-Out Effect or the Net Export Effect $505 AD 2
  17. 17. FISCAL POLICY, AGGREGATE SUPPLY AND INFLATION Price level Real GDP (billions) AS AD 2 $495 $515 P 1 AD 1 Fiscal Policy And Inflation $505
  18. 18. FISCAL POLICY IN THE OPEN ECONOMY Shocks Originating from Abroad Net Export Effect
  19. 19. SUPPLY-SIDE FISCAL POLICY Emphasis on Expansionary Tax Cuts Impact upon... <ul><li>Saving and Investment </li></ul><ul><li>Work Incentives </li></ul><ul><li>Risk Taking </li></ul>
  20. 20. SUPPLY-SIDE FISCAL POLICY 0 Price level Real domestic output, GDP AD 1 AD 2 AS 1 AS 2 P 1 P 2 P 3 Q 1 Q 2 Q 3
  21. 21. Forecasting the Future The Leading Indicators <ul><li>Average Workweek </li></ul><ul><li>Initial Claims for Unemployment Insurance </li></ul><ul><li>New Orders for Consumer Goods </li></ul><ul><li>Vendor Performance </li></ul><ul><li>New Orders for Capital Goods </li></ul><ul><li>Building Permits for Houses </li></ul><ul><li>Stock Prices </li></ul><ul><li>Money Supply </li></ul><ul><li>Interest-Rate Spread </li></ul><ul><li>Consumer Expectations </li></ul>
  22. 22. Forecasting the Future The Leading Indicators <ul><li>Average Workweek </li></ul><ul><li>Initial Claims for Unemployment Insurance </li></ul><ul><li>New Orders for Consumer Goods </li></ul><ul><li>Vendor Performance </li></ul><ul><li>New Orders for Capital Goods </li></ul><ul><li>Building Permits for Houses </li></ul><ul><li>Stock Prices </li></ul><ul><li>Money Supply </li></ul><ul><li>Interest-Rate Spread </li></ul><ul><li>Consumer Expectations </li></ul>Chapter Conclusions
  23. 23. <ul><li>fiscal policy </li></ul><ul><li>Employment Act of 1946 </li></ul><ul><li>Council of Economic Advisers (CEA) </li></ul><ul><li>expansionary fiscal policy </li></ul><ul><li>budget deficit </li></ul><ul><li>contractionary fiscal policy </li></ul><ul><li>budget surplus </li></ul><ul><li>built-in stabilizer </li></ul><ul><li>progressive tax system </li></ul><ul><li>proportional tax system </li></ul><ul><li>regressive tax system </li></ul><ul><li>full-employment budget </li></ul><ul><li>cyclical deficit </li></ul><ul><li>political business cycle </li></ul><ul><li>crowding-out effect </li></ul><ul><li>net export effect </li></ul><ul><li>supply-side fiscal policy </li></ul>KEY TERMS END BACK Copyright McGraw-Hill/Irwin, 2002
  24. 24. Chapter 13 Money and Banking Next...

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