This document discusses how fiscal policy can be used to prevent economic recession. It defines fiscal policy as taxation, expenditure, and borrowing by the government. During a recession, characterized by high unemployment and falling GDP and prices, expansionary fiscal policy can play an important role. The government can increase spending on public works projects to directly and indirectly boost income, consumption, output and employment. It can also enact tax cuts to increase disposable income and aggregate demand. These fiscal stimulus measures utilize the multiplier effect to help pull the economy out of recession through discretionary policy changes and automatic stabilizers in the tax system.
GDP, Inflation and unemployment for assessing Economic Health.MaherMubeen
Why do economists focus on GDP, Inflation, and unemployment for assessing the entire health of the economy? To know how much the countries are economically strong.
All the information about the fiscal policy is provided in this slide for ever BBA student it is easy to understand the fiscal policy and its terms and types INFORMATION FOR CLASS PROJECTS AND CLASS PRESENTATION
GDP, Inflation and unemployment for assessing Economic Health.MaherMubeen
Why do economists focus on GDP, Inflation, and unemployment for assessing the entire health of the economy? To know how much the countries are economically strong.
All the information about the fiscal policy is provided in this slide for ever BBA student it is easy to understand the fiscal policy and its terms and types INFORMATION FOR CLASS PROJECTS AND CLASS PRESENTATION
The slide contains a concise overview of the essential components of an effective Demand Management Policy. It defines demand management policy and emphasizes its importance in optimizing resource allocation and balancing supply-demand dynamics. The slide outlines the primary objectives of demand management, which include stabilizing prices, enhancing customer satisfaction, and reducing operational costs. It highlights key elements of a demand management policy, such as forecasting techniques, inventory management strategies, and demand shaping tactics. Visual aids like graphs, charts, and diagrams are incorporated to enhance comprehension and illustrate concepts effectively.
Class Lecture Notes Measuring the MacroeconomyProfessor Shari Lyman,.docxmccormicknadine86
Class Lecture Notes Measuring the MacroeconomyProfessor Shari Lyman, Ph.D.
GDP Measures
GDP is Gross Domestic Product
GDP is the value of all final goods and services produced within a country’s borders by its own citizens or foreign citizens in a given time period.
GNP is Gross National Product
GNP is the value of all final goods and services produced by a country’s citizens within the country’s borders or in foreign lands in a given time period. http://www.diffen.com/difference/GDP_vs_GNP
Intermediate goods are used to produce other goods. For example, when Pizza Hut buys cheese to produce pizzas, the cheese is an intermediate good.
Final goods are purchased by the end user. When the Lyman household purchases cheese, the cheese is a final good.
GDP is represented by the variable Y in macroeconomic calculations.
The formula for GDP is:
Y=Consumption(C)+Investment(I)+Government Expenditures(G)+Net Exports(X-M).
Consumption (durable and non-durable goods and services for individual household consumption)
Investment (Consumption of new physical capital and new housing such as factories, machines, tools, transportation systems, new houses, etc.) Investment is purchased using financial capital instruments.
Government expenditures (all Federal, State, and Local government purchases from paper clips to aircraft carriers).
Net Exports (Trade Balance=Exports-Imports)
Macroeconomic Measures introduces the student to 3 different methods of measuring GDP:
1.the incomes approach (simplified circular flow model-resource flow approach)
2.the expenditures approach (simplified circular flow model (D) money flow approach)
3.the output approach (simplified circular flow model (S) product flow approach).
Incomes Approach (Input/resource approach)
GDP (also known as national income which is indicated by Y) is equal to the inputs used in the production process. The inputs include:
land in the form of rent
labor in the form of wages
capital in the form of interest
entrepreneurship in the form of profit.
Y = rent + wages + interest + profit.
Expenditures Approach (Demand side approach)
GDP (also known as aggregate demand (AD) which is indicated by Y) is equal to the total output demanded in the economy. The outputs include:
consumption
investment
government expenditures
net exports
Y=Consumption(C)+Investment(I)+Government Expenditures(G)+Net Exports(X-M)
Output Approach (Supply side approach)
GDP (also known as national output which is indicated by Y) is equal to the outputs supplied to the economy. The outputs include:
household goods (durable and nondurable goods and services)
investment goods (new housing and capital)
government (durable and nondurable goods and services)
net exports (goods for export minus goods imported)
Y = Household (C) + Firm and HH (I) + (G) + Net Exports (X-M)
The Keynesian Consumption (Spending) Multiplier
The Keynesian Consumption Multiplier is based on the assumption that for each additional dollar a household receives some ...
DB2
7 Economic Policy Challenging Incrementalism
Incremental and Nonincremental Policymaking
Traditionally, fiscal and monetary policies were made incrementally; that is, decision makers concentrated their attention on modest changes—increases or decreases—in existing taxing, spending, and deficit levels, as well as the money supply and interest rates. Incrementalism was especially pervasive in annual federal budget making. The president and Congress did not reconsider the value of all existing programs each year, or pay much attention to previously established expenditure levels. Rather last year’s expenditures were considered as a base of spending for each program, attractive consideration of the budget proposals focused on new items or increases over last year’s base.
But crises often force policymakers to abandon incrementalism and reach out in non-incremental directions. In economic policy, the president and Congress and the Fed are pressured to “do something” in the face of a perceived economic crisis, even if there is little consensus on what should be done, or even whether there is anything the federal government can do to resolve the crisis. As we shall see later in this chapter, the recession that began in 2008 caused policymakers to search for new policies and make dramatic changes in spending and deficit levels and to undertake unprecedented measures to prevent the collapse of financial markets and avoid a deep recession.
Fiscal and Monetary Policy
Economic policy is exercised primarily through the federal government’s fiscal policies—decisions about taxing, spending, and deficit levels—and its monetary policies—decisions about the money supply and interest rates.
Fiscal policy is made in the annual preparation of the federal budget by the president and the Office of Management and Budget, and subsequently considered by Congress in its annual appropriations bills and revisions of the tax laws. These decisions determine overall federal spending levels, as well as spending priorities among federal programs. Together with tax policy decisions (see Chapter 8), these spending decisions determine the size of the federal government’s annual deficits or surpluses.
Monetary policy is the principal responsibility of the powerful and independent Federal Reserve Board—“the Fed”—which can expand or contract the money supply through its oversight of the nation’s banking system (see “The Fed at Work” later in this chapter). Congress established the Federal Reserve System and its governing Board in 1913 and Congress could, if it wished, reduce its power or even abolish the Fed altogether. But no serious effort has ever been undertaken to do so.
Economic Theories As Policy Guides
The goals of economic policy are widely shared: growth in economic output and standards of living, full and productive employment of the nation’s work force, and stable prices with low inflation. But a variety of economic theories compete for preeminence as ways of achiev.
1. Fiscal policy as a means to
prevent Recession
BY
MANGESH PATIL
JAYESH BHANDARI
ANKUSH MOGAL
SHREEGANESH SARVE
2. DEFINITION
Fiscal policy refers to the taxation, expenditure and
borrowing by the Government.
It is the most important instrument of government
intervention in the economy.
Three basic objectives –
1. Ensuring price stability
2. High output and employment level
3. Economic growth
3. Recession
The fall in general price level is called ‘Recession’.
This is a phase of a Business cycle which succeeds
the phase called ‘Peak or Maturity’.
This phase is characterized by following points-
High rate of unemployment
Substantial decrease in GNP
Fall in prices
Underutilised excess capacity
4. Illustrations of recessions
Great depression(1929-1933)
In US, Unemployment rate -3.2 to 25 %
GNP –Fall by 30 %
Recessionary situations in 1964,1984
Japan – 1990s period of sustained recession
(huge amount of savings)
World recession 2008 (sub prime crisis)
Eurozone crisis
5. Process of Recession
Peak Period in the Economy
Wave of pessimism amongst investors regarding the
mechanism of profit making in the market.
Lesser investments
Low aggregate expenditure and demand
Low national output
Cyclical unemployment
Depression
7. Need of fiscal policy in tackling recession
Superiority of fiscal policy to monetary policy
Monetary policy depends upon interest rates
Unemployment and pessimism in economy
Direct effect on income, employment, expenditure
and output.
‘Attack is the best defense’-Maintain full
employment with gradually rising price level
8. Expansionary fiscal policy
Discretionary fiscal policy
Deliberate change in government expenditure and taxes
to influence national output and prices
Non-discretionary fiscal policy
Automatic stabilizers-Built-in tax or expenditure
mechanism which automatically increases aggregate
demand in recessionary times.
1. Personal income tax
2. Corporate income tax
3. Transfer payments(unemployment compensation)
4. Welfare benefits
9. GOVERNMENT EXPENDITURE TO THE RESCUE
• Discretionary fiscal policy
Increase in expenditure by starting public works.
Ex.- Building roads, dams, ports, irrigation works,
electrification of new areas etc.
Two effects
Direct effect:- Increase in income of material suppliers &
labors
Indirect effect:- Increase in disposable income and
consumption expenditure
-Greater output, income and employment
- increase in transaction demand for money
11. Reduction in taxes
Indirect effect
Increase in disposable income and hence marginal
propensity to consume
E.g. Government reduces Rs. 200 crores of tax
people have Rs.150 crores as disposable income
(MPC=.75)
Keepin Govt. Expenditure constant, an upward shift
in C+I+G curve.
Decreased taxes =Increase in income, output,
employment
12. Illustrations
1964-US president John F. Kennedy waived off $12
billion worth of tax liabilities.
1984-US prez Ronald Reagen ordered reduction in
taxes