Ap Eco Chap12 Fiscal Policy
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Ap Eco Chap12 Fiscal Policy Ap Eco Chap12 Fiscal Policy Presentation Transcript

  • FISCAL POLICY 12 C H A P T E R
  • LEGISLATIVE MANDATES Employment Act of 1946 Council of Economic Advisors (CEA) Joint Economic Committee (JEC)
  • FISCAL POLICY AND THE AD-AS MODEL Two Options
    • Discretionary Fiscal Policy
    • Non-Discretionary Fiscal Policy
    Expansionary Fiscal Policy
    • Increase Government Spending
    • Tax Reductions
    • Combinations of the Two
  • 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
  • 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
  • FINANCING OF DEFICITS AND DISPOSING OF SURPLUSES
    • Borrowing vs. New Money
      • Borrowing From The Public
      • Money Creation
    • Debt Retirement vs. Idle Surplus
      • Debt Reduction
      • Impounding
    Which Policy Option? G or T?
  • 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
  • BUILT-IN STABILITY GDP 1 GDP 2 GDP 3 Real Domestic Output, GDP Government Expenditures, G, and Tax Revenues, T Deficit Surplus T G
  • BUILT-IN STABILITY
    • Tax Progressivity
    • Progressive Tax System
    • Proportional Tax System
    • Regressive Tax System
    The more progressive the tax system, the greater the economy’s built-in stability
  • 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
  • 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
  • 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
  • -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
  • PROBLEMS, CRITICISMS, AND COMPLICATIONS
    • Problems of Timing
      • Recognition Lag
      • Administrative Lag
      • Operational Lag
    • A Political Business Cycle?
      • Offsetting State & Local Finance
    • Crowding-Out Effect
  • FISCAL POLICY, AGGREGATE SUPPLY AND INFLATION Price level Real GDP (billions) AS AD 2 $495 $515 P 1 AD 1 Fiscal Policy: Pure & Simple
  • 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
  • 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
  • FISCAL POLICY IN THE OPEN ECONOMY Shocks Originating from Abroad Net Export Effect
  • SUPPLY-SIDE FISCAL POLICY Emphasis on Expansionary Tax Cuts Impact upon...
    • Saving and Investment
    • Work Incentives
    • Risk Taking
  • 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
  • Forecasting the Future The Leading Indicators
    • Average Workweek
    • Initial Claims for Unemployment Insurance
    • New Orders for Consumer Goods
    • Vendor Performance
    • New Orders for Capital Goods
    • Building Permits for Houses
    • Stock Prices
    • Money Supply
    • Interest-Rate Spread
    • Consumer Expectations
  • Forecasting the Future The Leading Indicators
    • Average Workweek
    • Initial Claims for Unemployment Insurance
    • New Orders for Consumer Goods
    • Vendor Performance
    • New Orders for Capital Goods
    • Building Permits for Houses
    • Stock Prices
    • Money Supply
    • Interest-Rate Spread
    • Consumer Expectations
    Chapter Conclusions
    • fiscal policy
    • Employment Act of 1946
    • Council of Economic Advisers (CEA)
    • expansionary fiscal policy
    • budget deficit
    • contractionary fiscal policy
    • budget surplus
    • built-in stabilizer
    • progressive tax system
    • proportional tax system
    • regressive tax system
    • full-employment budget
    • cyclical deficit
    • political business cycle
    • crowding-out effect
    • net export effect
    • supply-side fiscal policy
    KEY TERMS END BACK Copyright McGraw-Hill/Irwin, 2002
  • Chapter 13 Money and Banking Next...