Ppt econ 9e_one_click_ch24

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Ppt econ 9e_one_click_ch24

  1. 1. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 1 of 39 PowerPoint Lectures for Principles of Economics, 9e By Karl E. Case, Ray C. Fair & Sharon M. Oster ; ;
  2. 2. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 2 of 39
  3. 3. © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster PART V THE CORE OF MACROECONOMIC THEORY 24The Government and Fiscal Policy Fernando & Yvonn Quijano Prepared by:
  4. 4. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 4 of 39 24 Government in the Economy Government Purchases (G), Net Taxes (T), and Disposable income (Y d) The Determination of Equilibrium Output (Income) Fiscal Policy at Work: Multiplier Effects The Government Spending Multiplier The Tax Multiplier The Balanced-Budget Multiplier The Federal Budget The Budget in 2007 Fiscal Policy Since 1993: The Clinton and Bush Administrations The Federal Government Debt The Economy’s Influence on the Government Budget Tax Revenues Depend on the State of the Economy Some Government Expenditures Depend on the State of the Economy Automatic Stabilizers Fiscal Drag Full-Employment Budget Looking Ahead Appendix A: Deriving the Fiscal Policy Multipliers Appendix B: The Case in Which Tax Revenues Depend on Income CHAPTER OUTLINE The Government and Fiscal Policy PART V THE CORE OF MACROECONOMIC THEORY
  5. 5. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 5 of 39 The Government and Fiscal Policy fiscal policy The government’s spending and taxing policies. monetary policy The behavior of the Federal Reserve concerning the nation’s money supply.
  6. 6. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 6 of 39 Government in the Economy discretionary fiscal policy Changes in taxes or spending that are the result of deliberate changes in government policy. net taxes (T) Taxes paid by firms and households to the government minus transfer payments made to households by the government. disposable, or after-tax, income (Yd) Total income minus net taxes: Y - T. Government Purchases (G), Net Taxes (T), and Disposable Income (Yd) disposable income ≡ total income − net taxes Yd ≡ Y − T
  7. 7. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 7 of 39 Government in the Economy Government Purchases (G), Net Taxes (T), and Disposable Income (Yd)  FIGURE 24.1 Adding Net Taxes (T) and Government Purchases (G) to the Circular Flow of Income
  8. 8. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 8 of 39 Government in the Economy Government Purchases (G), Net Taxes (T), and Disposable Income (Yd) When government enters the picture, the aggregate income identity gets cut into three pieces: Y Y Td ≡ − Y C Sd ≡ + Y T C S− ≡ + Y C S T≡ + + And aggregate expenditure (AE) equals: AE C I G= + +
  9. 9. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 9 of 39 Government in the Economy Government Purchases (G), Net Taxes (T), and Disposable Income (Yd) budget deficit The difference between what a government spends and what it collects in taxes in a given period: G - T. budget deficit ≡ G − T
  10. 10. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 10 of 39 Government in the Economy Government Purchases (G), Net Taxes (T), and Disposable Income (Yd) Adding Taxes to the Consumption Function To modify our aggregate consumption function to incorporate disposable income instead of before- tax income, instead of C = a + bY, we write C = a + bYd or C = a + b(Y − T) Our consumption function now has consumption depending on disposable income instead of before-tax income.
  11. 11. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 11 of 39 Government in the Economy Government Purchases (G), Net Taxes (T), and Disposable Income (Yd) Planned Investment The government can affect investment behavior through its tax treatment of depreciation and other tax policies.
  12. 12. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 12 of 39 Government in the Economy The Determination of Equilibrium Output (Income) Y = C + I + G TABLE 24.1 Finding Equilibrium for I = 100, G = 100, and T = 100 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Output (Income) Y Net Taxes T Disposable Income Yd Y − T Consumption Spending (C = 100 + .75 Yd) Saving S (Yd – C) Planned Investment Spending I Government Purchases G Planned Aggregate Expenditure C + I + G Unplanned Inventory Change Y − (C + I + G) Adjustment to Disequi- librium 300 100 200 250 − 50 100 100 450 − 150 Output 500 100 400 400 0 100 100 600 − 100 Output 700 100 600 550 50 100 100 750 − 50 Output 900 100 800 700 100 100 100 900 0 Equilibrium 1,100 100 1,000 850 150 100 100 1,050 + 50 Output 1,300 100 1,200 1,000 200 100 100 1,200 + 100 Output 1,500 100 1,400 1,150 250 100 100 1,350 + 150 Output
  13. 13. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 13 of 39 Government in the Economy The Determination of Equilibrium Output (Income)  FIGURE 24.2 Finding Equilibrium Output/Income Graphically Because G and I are both fixed at 100, the aggregate expenditure function is the new consumption function displaced upward by I + G = 200. Equilibrium occurs at Y = C + I + G = 900.
  14. 14. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 14 of 39 Government in the Economy The Determination of Equilibrium Output (Income) The Saving/Investment Approach to Equilibrium saving/investment approach to equilibrium: S + T = I + G To derive this, we know that in equilibrium, aggregate output (income) (Y) equals planned aggregate expenditure (AE). By definition, AE equals C + I + G; and by definition, Y equals C + S + T. Therefore, at equilibrium C + S + T = C + I + G Subtracting C from both sides leaves: S + T = I + G
  15. 15. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 15 of 39 Fiscal Policy at Work: Multiplier Effects At this point, we are assuming that the government controls G and T. In this section, we will review three multipliers: Government spending multiplier Tax multiplier Balanced-budget multiplier
  16. 16. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 16 of 39 Fiscal Policy at Work: Multiplier Effects The Government Spending Multiplier 1 government spending multiplier MPS = government spending multiplier The ratio of the change in the equilibrium level of output to a change in government spending.
  17. 17. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 17 of 39 Fiscal Policy at Work: Multiplier Effects The Government Spending Multiplier TABLE 24.2 Finding Equilibrium After a Government Spending Increase of 50 (G Has Increased from 100 in Table 24.1 to 150 Here) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Output (Income) Y Net Taxes T Disposable Income Yd Y − T Consumption Spending (C = 100 + .75 Yd) Saving S (Yd – C) Planned Investment Spending I Government Purchases G Planned Aggregate Expenditure C + I + G Unplanned Inventory Change Y − (C + I + G) Adjustment To Disequilibrium 300 100 200 250 − 50 100 150 500 − 200 Output 500 100 400 400 0 100 150 650 − 150 Output 700 100 600 550 50 100 150 800 − 100 Output 900 100 800 700 100 100 150 950 − 50 Output 1,100 100 1,000 850 150 100 150 1,100 0 Equilibrium 1,300 100 1,200 1,000 200 100 150 1,250 + 50 Output
  18. 18. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 18 of 39 Fiscal Policy at Work: Multiplier Effects The Government Spending Multiplier  FIGURE 24.3 The Government Spending Multiplier Increasing government spending by 50 shifts the AE function up by 50. As Y rises in response, additional consumption is generated. Overall, the equilibrium level of Y increases by 200, from 900 to 1,100.
  19. 19. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 19 of 39 Fiscal Policy at Work: Multiplier Effects The Tax Multiplier tax multiplier The ratio of change in the equilibrium level of output to a change in taxes. ( )tax multiplier MPC MPS ≡ − ∆ Y M P S = ×      ( i n i t i a l i n c r e a s e i n a g g r e g a t e e x p e n d i t u r e ) 1 1 ( ) MPC Y T MPC T MPS MPS ∆ = − ∆ × × = −∆ ×      ÷  ÷    
  20. 20. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 20 of 39 Fiscal Policy at Work: Multiplier Effects The Balanced-Budget Multiplier balanced-budget multiplier The ratio of change in the equilibrium level of output to a change in government spending where the change in government spending is balanced by a change in taxes so as not to create any deficit. The balanced-budget multiplier is equal to 1: The change in Y resulting from the change in G and the equal change in T are exactly the same size as the initial change in G or T. 1balanced-budget multiplier ≡
  21. 21. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 21 of 39 Fiscal Policy at Work: Multiplier Effects The Balanced-Budget Multiplier TABLE 24.3 Finding Equilibrium After a Balanced-Budget Increase in G and T of 200 Each (Both G and T Have Increased from 100 in Table 24.1 to 300 Here) (1) (2) (3) (4) (5) (6) (7) (8) (9) Output (Income) Y Net Taxes T Disposable Income Yd Y − T Consumption Spending (C = 100 + .75 Yd) Planned Investment Spending I Government Purchases G Planned Aggregate Expenditure C + I + G Unplanned Inventory Change Y − (C + I + G) Adjustment To Disequilibrium 500 300 200 250 100 300 650 − 150 Output 700 300 400 400 100 300 800 − 100 Output 900 300 600 550 100 300 950 − 50 Output 1,100 300 800 700 100 300 1,100 0 Equilibrium 1,300 300 1,000 850 100 300 1,250 + 50 Output 1,500 300 1,200 1,000 100 300 1,400 + 100 Output
  22. 22. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 22 of 39 Fiscal Policy at Work: Multiplier Effects The Balanced-Budget Multiplier TABLE 24.4 Summary of Fiscal Policy Multipliers Policy Stimulus Multiplier Final Impact On Equilibrium Y Government spending multiplier Increase or decrease in the level of government purchases: ∆G Tax multiplier Increase or decrease in the level of net taxes: ∆T Balanced- budget multiplier Simultaneous balanced-budget increase or decrease in the level of government purchases and net taxes: ∆G = ∆T 1 1 M P S − M P C M P S 1 G MPS ∆ × MPC T MPS − ∆ × ∆ G
  23. 23. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 23 of 39 The Federal Budget federal budget The budget of the federal government. The “budget” is really three different budgets. First, it is a political document that dispenses favors to certain groups or regions and places burdens on others. Second, it is a reflection of goals the government wants to achieve. Third, the budget may be an embodiment of some beliefs about how (if at all) the government should manage the macroeconomy.
  24. 24. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 24 of 39 The Federal Budget The Budget in 2007 TABLE 24.5 Federal Government Receipts and Expenditures, 2007 (Billions of Dollars) Amount Percentage Of Total Receipts Personal income taxes 1,162.1 43.5 Excise taxes and customs duties 99.9 3.7 Corporate income taxes 380.8 14.3 Taxes from the rest of the world 13.4 0.5 Contributions for social insurance 953.0 35.7 Interest receipts and rents and royalties 25.1 0.9 Current transfer receipts from business and persons 39.4 1.5 Current surplus of government enterprises − 2.3 − 0.0 Total 2,671.4 100.0 Current Expenditures Consumption expenditures 856.0 29.6 Transfer payments to persons 1,270.7 43.9 Transfer payments to the rest of the world 38.6 1.3 Grants-in-aid to state and local governments 377.5 13.1 Interest payments 302.4 10.5 Subsidies 46.7 1.6 Total 2,892.0 100.0 Net federal government saving—surplus (+) or deficit (−) (Total current receipts − Total current expenditures) − 220.6 Source: U.S. Department of Commerce, Bureau of Economic Analysis.
  25. 25. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 25 of 39 The Federal Budget The Budget in 2007 federal surplus (+) or deficit (−) Federal government receipts minus expenditures.
  26. 26. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 26 of 39 The Federal Budget Fiscal Policy Since 1993: The Clinton and Bush Administrations  FIGURE 24.4 Federal Personal Income Taxes as a Percentage of Taxable Income, 1993 I–2007 IV
  27. 27. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 27 of 39 The Federal Budget Fiscal Policy Since 1993: The Clinton and Bush Administrations  FIGURE 24.5 Federal Government Consumption Expenditures as a Percentage of GDP and Federal Transfer Payments and Grants-in-Aid as a Percentage of GDP, 1993 I–2007 IV
  28. 28. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 28 of 39 The Federal Budget Fiscal Policy Since 1993: The Clinton and Bush Administrations  FIGURE 24.6 The Federal Government Surplus (+) or Deficit (–) as a Percentage of GDP, 1993 I–2007 IV
  29. 29. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 29 of 39 The Federal Budget The Federal Government Debt federal debt The total amount owed by the federal government. privately held federal debt The privately held (non-government-owned) debt of the U.S. government.
  30. 30. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 30 of 39 The Federal Budget The Federal Government Debt  FIGURE 24.7 The Federal Government Debt as a Percentage of GDP, 1993 I–2007 IV
  31. 31. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 31 of 39 The Economy’s Influence on the Government Budget Tax Revenues Depend on the State of the Economy Tax revenue, on the other hand, depends on taxable income, and income depends on the state of the economy, which the government does not completely control. Some Government Expenditures Depend on the State of the Economy Transfer payments tend to go down automatically during an expansion. Inflation often picks up when the economy is expanding. This can lead the government to spend more than it had planned to spend. Any change in the interest rate changes government interest payments.
  32. 32. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 32 of 39 The Economy’s Influence on the Government Budget Some Government Expenditures Depend on the State of the Economy Fiscal Policy In 2008 Congress Approves Economic-Stimulus Bill Wall Street Journal
  33. 33. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 33 of 39 The Economy’s Influence on the Government Budget Automatic Stabilizers automatic stabilizers Revenue and expenditure items in the federal budget that automatically change with the state of the economy in such a way as to stabilize GDP. Fiscal Drag fiscal drag The negative effect on the economy that occurs when average tax rates increase because taxpayers have moved into higher income brackets during an expansion.
  34. 34. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 34 of 39 The Economy’s Influence on the Government Budget Full-Employment Budget full-employment budget What the federal budget would be if the economy were producing at the full-employment level of output. structural deficit The deficit that remains at full employment. cyclical deficit The deficit that occurs because of a downturn in the business cycle.
  35. 35. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 35 of 39 automatic stabilizers balanced-budget multiplier budget deficit cyclical deficit discretionary fiscal policy disposable, or after-tax, income (Yd) federal budget federal debt federal surplus (+) or deficit (−) fiscal drag fiscal policy full-employment budget government spending multiplier monetary policy REVIEW TERMS AND CONCEPTS net taxes (T) privately held federal debt structural deficit tax multiplier 1. Disposable income Yd ≡ Y − T 2. AE ≡ C + I + G 3. Government budget deficit ≡ G − T 4. Equilibrium in an economy with government: Y = C + I + G 5. Saving/investment approach to equilibrium in an economy with government: S + T = I + G 6. Government spending multiplier ≡ 7. Tax multiplier ≡ 8. Balanced-budget multiplier ≡ 1 MPC MPS   − ÷   MPS 1
  36. 36. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 36 of 39 DERIVING THE FISCAL POLICY MULTIPLIERS A P P E N D I X A THE GOVERNMENT SPENDING AND TAX MULTIPLIERS Y C I G= + + C a b Y T= + −( ) Y a b Y T I G= + − + +( ) Y a b Y b T I G= + − + + Y b Y a I G b T− = + + − Y b a I G b T( )1 − = + + − ( ) )( 1 1 bTGIa b Y −++ − =
  37. 37. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 37 of 39 DERIVING THE FISCAL POLICY MULTIPLIERS THE BALANCED-BUDGET MULTIPLIER The balanced-budget multiplier is found by combining the effects of government spending and taxes: G∆increase in spending: ( )C T MPC∆ = ∆- decrease in spending: ( )G T MPC∆ − ∆= net increase in spending In a balanced-budget increase, ΔG = ΔT; so we can substitute: net initial increase in spending: ΔG − ΔG (MPC) = ΔG (1 − MPC) A P P E N D I X A
  38. 38. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 38 of 39 DERIVING THE FISCAL POLICY MULTIPLIERS THE BALANCED-BUDGET MULTIPLIER A P P E N D I X A 1 ( )Y G MPS G MPS   ∆ = ∆ = ∆ ÷   Because MPS = (1 − MPC), the net initial increase in spending is: ΔG (MPS) We can now apply the expenditure multiplier to this net initial increase in spending:       MPS 1
  39. 39. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 39 of 39 THE CASE IN WHICH TAX REVENUES DEPEND ON INCOME A P P E N D I X B TYYd −≡ )3/1200( YYYd +−−≡ YYYd 3/1200 −+≡ dYC 75.100 += )3/1200(75.100 YYC −++=  FIGURE 24B.1 The Tax Function
  40. 40. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 40 of 39 THE CASE IN WHICH TAX REVENUES DEPEND ON INCOME A P P E N D I X B When taxes are strictly lump-sum (T = 100) and do not depend on income, the aggregate expenditure function is steeper than when taxes depend on income.  FIGURE 24B.2 Different Tax Systems GICY ++= { {100 .75( 200 1/3 ) 100 100Y Y Y I GC = + + − + + 14444244443 4505. 5.450 10010025.15075.100 = += ++−++= Y YY YYY
  41. 41. CHATheGovernmentan © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 41 of 39 THE CASE IN WHICH TAX REVENUES DEPEND ON INCOME A P P E N D I X B THE GOVERNMENT SPENDING AND TAX MULTIPLIERS ALGEBRAICALLY C a b Y T= + −( ) 0C a bY bT btY= + − − 0( )C a b Y T tY= + − − 0 Y a bY bT btY I G C = + − − + + 144424443 Y b b t a I G b T= − + + + − 1 1 0( ) 1 1 b bt− +

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