Transcript Using Economic Indicators for Fiscal Policy Decision Making

Using Economic Indicators for
Fiscal Policy Decision Making
• Leading Indicators
– Change before the Economy reacts
• Co-incident Indicators
– Changes with the Economy and Business
Cycles.
• Lagging Indicators
– Change after an event in the Economy
Leading Indicators
•
•
•
•
•
•
•
Consumer Confidence
CPI
GDP
Housing Starts
Retail Sales Data
PPI
Employment Situation
Coincident Indicators
• Non-agricultural employment
• Personal Income
• Industrial Production
Lagging Indicators
• Change in CPI from previous month
• Ratio of inventories to sales made
• Ratio of consumer credit outstanding to
personal income
• Average prime rate charged by banks
Deficits and Debt: Terminology
and Facts
• Budget Deficit = excess of a government’s
expenditures over its receipts in a period of
time
• National Debt = total value of government
indebtedness at a moment in time
Deficits and Debt: Terminology
and Facts
• Some Facts about the National Debt
– In absolute terms the debt is large, but as a
proportion of GDP it is less than one half.
– Some, but not all, is backed by government
assets.
– Before the 1980s, most of the debt was
accumulated in times of war and recession.
31-3 The U.S. National
Debt Relative to GDP, 1915-2001
FIGURE
1.00
Gross Domestic Product
Ratio of Public Debt to
1981–1982
Recession
World
War II
0.67
Great
Depression
1974–1975
Recession
0.50
World
War I
0.33
1915
1925
1935
1945
1955
Year
1965
1975
1981–1984
Tax cuts
1993 Budget
Agreement
1985
1995
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Interpreting the Budget Deficit or
Surplus
• Deficit rises in a recession and falls in a
boom even with no change in fiscal policy.
• Structural deficit (or surplus) = what the
deficit (or surplus) would be at full
employment
– Portion of the deficit unrelated to the business
cycle
– Shows how the deficit is related to government
policy
Budget Deficits and Inflation
• Deficits   AD
– Can cause inflation if economy is strong, since
AS curves slope upward
31-6 The Inflationary
Effects of Deficit Spending
FIGURE
D1
Aggregate supply
curve shifts
inward as wages rise
Potential
GDP
D0
S
112
Price Level
C
106
B
100
A
D1
S
D0
$5,000
$6,000
$7,000
Deficit spending
boosts aggregate
demand
$8,000
Real GDP
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Budget Deficits and Inflation
• The Monetization Issue
– If the Federal Reserve takes no countervailing
actions, an expansionary fiscal policy that
increases the budget deficit will tend to
•  real GDP and prices
• Cause outward shift of the demand curve for money
•  interest rates
FIGURE
31-7 Fiscal Expansion and
Interest Rates
M0
M1
S
Interest Rate
For given
Fed policy
B
Shift in money
demand caused
by rising Y and P
A
M
D0
D1
Quantity of Money
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Budget Deficits and Inflation
• The Monetization Issue
– If the Fed does not want interest rates to rise
• It can engage in expansionary open-market
operations, that is, purchase more government debt.
• The money supply will then increase.
• The portion of the deficit purchased by the Fed has
been monetized.