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Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
Ap Eco Chap12 Fiscal Policy
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Ap Eco Chap12 Fiscal Policy

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  • 1. FISCAL POLICY 12 C H A P T E R
  • 2. LEGISLATIVE MANDATES Employment Act of 1946 Council of Economic Advisors (CEA) Joint Economic Committee (JEC)
  • 3. 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
  • 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. 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. 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?
  • 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. 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. 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
  • 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. 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. 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. -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. PROBLEMS, CRITICISMS, AND COMPLICATIONS
    • Problems of Timing
      • Recognition Lag
      • Administrative Lag
      • Operational Lag
    • A Political Business Cycle?
      • Offsetting State & Local Finance
    • Crowding-Out Effect
  • 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. 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. 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. FISCAL POLICY IN THE OPEN ECONOMY Shocks Originating from Abroad Net Export Effect
  • 19. SUPPLY-SIDE FISCAL POLICY Emphasis on Expansionary Tax Cuts Impact upon...
    • Saving and Investment
    • Work Incentives
    • Risk Taking
  • 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. 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
  • 22. 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
  • 23.
    • 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
  • 24. Chapter 13 Money and Banking Next...

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