How do governments stabilize the economy?

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Fiscal Policy

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How do governments stabilize the economy?

  1. 1. How do Governments Stabilize Economies?<br />Fiscal Policy Automatic Stabilizers<br />
  2. 2. Tools of Fiscal Policy<br />Taxes<br />Taxes<br />Government Spending<br />Goals: Price Stability and Full Employment<br />
  3. 3. Types of Fiscal Policy (Discretionary Stabilizers)<br />Combats recessions<br />Lowers Taxes<br />Increases Govt. Spending<br />Combats inflation<br />Increases Taxes<br />Decreases Govt. Spending<br />Expansionary<br />Contractionary<br />
  4. 4. Expansionary Fiscal Policy<br />(LRAS)<br />(LRAS)<br />
  5. 5. Contractionary Fiscal Policy<br />(LRAS =<br />Potential GDP) <br />
  6. 6. Problemas<br />Time lags<br />Hard to predict<br />Difficult to implement<br />Political Motivation<br />Favor Tax Cuts<br />Crowding Out<br /> Crowding In<br />
  7. 7. WHAT ARE CONSEQUNECES OF FISCAL POLICY?<br />Govts. borrow money to finance increased spending<br />Interest rates increase<br />Private Investment Decreases<br />Deficits increases<br />Govts. cut spending, so demand for loans falls<br />Interest rates decrease<br />Private Investment Increases<br />EXPANSIONARY: <br />“CROWDING OUT”<br />CONTRACTIONARY: “CROWDING IN”<br />
  8. 8. MARKET FOR LOANS<br /> INVESTMENT DEMAND<br />SLF<br />r%<br />r%<br />r1<br />r<br />DLF 1<br /> ID<br />DLF<br />Q<br />Q<br />“CROWDING OUT” = Higher r  Less I  Less AD<br />

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