The document discusses the effects of various economic events and policies on inflation and unemployment: - Consumer expectations of an economic downturn could raise unemployment and lower inflation. - Higher business expectations from a new president could lower unemployment and raise inflation. - Lower electricity prices from solar energy adoption could lower inflation and have varying effects on unemployment. - Raising the gasoline tax to balance the budget could raise both inflation and unemployment. The document then analyzes different types of fiscal policy and their goals, including providing public goods, stabilizing the economy, and promoting cultural values through spending and taxation. Expansionary and contractionary policies are discussed as tools to influence aggregate demand and supply.

1. Analyze the effect of each on
inflation and unemployment:
Consumers expect an economic downturn
A new president is elected and the profit expectations of
business executives rise
Power companies switch to solar energy causing electricity
prices to fall
Federal government increases the sales tax on gasoline to
balance the budget

2. What graphical explanation would
explain following conditions?
Price Level and unemployment rise
Price level falls and unemployment rises
Price level falls and unemployment stays the same
Price level remains the same and unemployment rises

3. Fiscal Policy

4. Government’s Role
Regulation of Private
Market, including
externalities & information
Provision of Public Goods
Institutional Stability,
including courts and banks
Promoting Cultural Values

5. Why Provide Public Goods?
Equity – Everyone should have access to 911 services
Efficiency – Economies of scale and easier to collectively
provide
Overcome Free Rider problem – will not be privately
provided
Provide infrastructure necessary to society and
economy, See Monty Python

6. Types of Spending
Choice or Discretionary: Funded year to year
Mandatory or Non-discretionary: Funded by existing laws
Automatic Stabilizers: Unemployment and Income support

8. Social Security and Mandatory spending increasing as
population ages and health care costs go up
Could change eligibility requirements

9. Defense
51%
Domestic
46%
International
3%

10. Goals of Federal Spending
Provide and maintain public goods (infrastructure)
Armies, parks, highways, coastlines, banks
Promote cultural values
Education, health care, income redistribution
Stabilize the national economy
Growth, full employment, low inflation

11. Stabilizing the economy
Expansionary Contractionary
Decrease taxes
Automatic rate reduction
as income falls
Tax credits or breaks
Increase spending
Automatic increase
through unemployment
and food stamps
Discretionary programs
Increase taxes
Automatic rate increase as
income rises
Tax hikes or elimination of
loop holes and breaks
Decrease spending
Automatic decrease
through unemployment
and food stamps
Discretionary programs

12. Vote, Veto, Vote again
Discretionary Changes Automatic Stabilizers
Identification of problem
Agreeing to a remedy
Time for Remedy to take
effect
No identification
Real time corrections

13. -

14. Fiscal Policy Complications
Crowding out: Deficits and debts
Regulatory lags: recognition, execution and implementation
Ricardian Equivalence: No effect

15. Taxes
The revenue side

16. 16th
amendment

17. Consider tax policies:
Current Marginal tax System
Head Tax
Flat Tax
Consumption tax

18. Tax Evaluation
Consider efficiency and equity
Efficiency – Does it distort behavior (dividend taxes)
 & is administration simple (1040 form)
Equity – Is it Fair
Define fairness
Benefits Received
Revenue from gas tax goes towards road maintenance
Ability to Pay
More one makes the more one pays

20. Tax revenues collected with each plan

21. Tax Evaluation
 Proportional
 Average tax rate same at all levels
 Regressive
 Average tax rate decreases as income increases
 Progressive
 Average tax rate increases as income increases

22. Tax breaks
https://www.nationalpriorities.org/interactive-
data/taxbreaks/2014/visualization/
2016 candidate tax plan comparison
http://apps.urban.org/features/tpccandidate/
Enter income see tax burden change with each candidate
http://www.taxpolicycenter.org/interactive-tools/vox-
presidential-tax-calculator

25. How high is too high?

27. Tax vs Spending
Taxing one-time bill on the books indefinitely – complicated
tax code
Spending annual appropriation
Spending $1 same as Taxing one less $1
Both $1 in her pocket only different politically

28. Fiscal Policy and AD-AS

29. How to move the economy:
Supply Side Demand Side
JB Say “Supply creates its
own demand”
Long run plan
Keynes need for stimulus
Can have quick effects
AS’
AD’

30. Expansionary: Increase AD
Automatic Stabilizers:
Unemployment checks + lower tax brackets
Decrease taxes
Increase Spending

31. Expansionary: Increase AS
Create business/resource incentives
Lower (certain) taxes

32. Contractionary: Decrease AD
Automatic Stabilizers:
Fewer unemployment checks + higher tax brackets
Increase taxes
Decrease spending