The document discusses fiscal policy and the expenditure multiplier. It explains that fiscal policy uses changes in government spending and taxation to influence the level of economic activity. It also discusses how the expenditure multiplier effect causes an initial change in spending to be multiplied through subsequent rounds of spending. Government spending is more directly impactful on the economy than taxation due to how consumers respond to tax changes. The document also covers crowding out, which occurs when government borrowing to finance spending bids up interest rates and reduces private investment.

1. Fiscal Policy &
the Expenditure Multiplier
tracking MacroEconomic
Trends and Statistics and
evaluating the impact of
government related activities
1

2. Unemployment
Seasonally Adjusted Monthly Unemployment
Rate, from January 1984 to December 2004
Unemployment Rate
10
9
8
7
(%)
6
5
4
3
2
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
8
8
8
9
9
9
9
0
0
9
0
4
8
4
6
8
2
4
6
0
2
0
Month
2

3. Economic Growth
Percentage Change in Real Gross Domestic
Product (1984-2004)
8
Percentage Change
7
6
5
4
3
2
1
0
-1
19
19
19
19
19
19
19
19
20
20
20
92
94
96
98
84
86
88
90
00
02
04
Year
3

4. CPI & PPI
Percentage Change in Consumer Price Index (Not
Seasonally Adjusted, 1982-84=100) and Implicit Price
Deflator (2000=100), 1984-2003
% change in CPI % change in IPD
Percentage Change
6.00
5.00
4.00
3.00
2.00
1.00
0.00
1
1
1
1
1
1
1
1
2
2
98
98
98
99
99
99
99
99
00
00
4
6
8
0
2
4
6
8
0
2
Year
4

5. Income Determination
GDP = C + I + G + (X-M)
•CONSUMPTION
•INVESTMENT
•GOVERNMENT
•NET EXPORTS
5

6. Fiscal Policy
• Changes in government spending and
changes in taxation influence the
level of economic activity
– Increases in taxes contract the economy
– Decreases in taxes stimulate the
economy
– Increases in government spending will
stimulate the economy
– Decreases in government spending will
contract the economy
• together the President and Congress
determine fiscal policy
6

7. Government Spending or Taxes?
• why do changes in (“G”) government
spending levels have greater impact
on the economy than changes in
(“T”) taxation levels
– Government spending is direct
– Taxes depend on what consumers do
with the tax cut. What they would have
done with the money going to support
the levels of taxes (how much would
they consume or how much would they
save of the changing marginal funds)
7

8. Crowding Out
• Government increases spending
• Government finances the spending by
borrowing in credit market
• the interest rates go up
• the rate and amount of private
investment falls
• the increase in government spending
is offset by a decrease in private
investment
8

9. The Expenditure Multiplier
• There is a change in spending
• The change in spending becomes a
change in income for others
• Those changes in income become
spending
• The change in spending becomes a
change in income for others
• then the same process happens again
and again and again…….
9

10. Main Points ~ page i
• Three (3) MacroEconomic goals
– are: (i) Full employment; (ii)
economic growth; and (iii) price
stability
• Discretionary Fiscal Policy is the
use of changes in government
spending and taxation rates to
influence the level of economic
activity
10

11. Main Points ~ page ii
• using the Expenditure Multiplier
a change in initial spending is
multiplied to cause greater
changes in spending levels
• remember changes in G have
more direct and greater impact
on spending levels than changes
in T
11

12. Main Points ~ page iii
• the Government runs a deficit when
spending is greater than tax receipts
in a given year
• the amount of Government Debt is
the accumulation of annual deficits
• the Crowding Out effect occurs when
government spending is financed by
private borrowing and raises interest
rates thereby crowding out private
investment
12