Transcript FIGURE 30-5 Stabilization Policy with a Flat AS Curve

Debate: Should the Government
Intervene?
• The debate is partly political.
• It also depends on strictly economic
questions:
– How long are the lags?
– How effective are the automatic stabilizers?
Debate: Should the Government
Intervene?
– Long lags  attempts at stabilizing the
economy can actually destabilize it
• How fast the economy’s self-correcting mechanism
works
• How long the lags in stabilization policy are
• How accurate economic forecasts are
FIGURE
27-7 Expansionary Fiscal
Policy
S
D1
Price Level
D0
A
Rise in
price level
E
D1
S
Rise in
real GDP
D0
Real GDP
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
The Idea Behind Supply-Side Tax
Cuts
• Supply-side economics = idea that  taxes
  AS 
–  GDP
–  price level
FIGURE
27-8 The Goal of SupplySide Tax Cuts
S0
S1
Price Level
D
A
B
S0
S1
D
Real GDP
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
27-9 A Successful SupplySide Tax Reduction
FIGURE
D1
S0
S1
Price Level
D0
A
C
E
D1
S0
S1
D0
Real GDP
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
The Idea Behind Supply-Side Tax
Cuts
• The tax cuts particularly favored are:
– Lower personal income tax rates
– Lower or even zero taxes on income from
saving
– Lower taxes on capital gains
– Lower corporate income taxes
The Idea Behind Supply-Side Tax
Cuts
• Some Flies in the Ointment
– The small magnitude of the likely effects
– The large effects on aggregate demand
– The problems in timing
• The supply effects will take a long time to occur
• The demand effects will take only a short time
– The effects on income distribution
– The loss of tax revenue
27-10 A More Pessimistic
View of Supply-Side Tax Cuts
FIGURE
D1
S0
S1
Price Level
D0
C
E
D1
S0
S1
D0
Real GDP
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Toward Assessment of SupplySide Economics
• Supply-side tax cuts have their pros and
cons.
• It is unlikely, however, that they can work
as strongly or as quickly as their most
ardent admirers think.
30-5 Stabilization Policy
with a Flat AS Curve
FIGURE
D1
D0
D2
A
101
Rise in price
100
99
Price Level
Price Level
D0
S
E
101
E
100
Fall in price
99
S
S
B
S
D0
Rise in output
6,000
6,400
D1
D2
D0
Fall in output
5,600
6,000
Real GDP
Real GDP
(a) Expansionary Policy
(b) Contractionary Policy
Copyright © 2003 South-Western/Thomson Publishing. All rights reserved.
30-6 Stabilization Policy
with a Steep AS Curve
FIGURE
D1
S
S
D0
D0
A
110
Rise in
price
E
D1
100
90
D0
S
Rise in
output
6,000 6,100
Real GDP
(a) Expansionary Policy
Price Level
Price Level
110
D2
E
100
Fall in
price
B
90
D0
S
Fall in
output
D2
5,900 6,000
Real GDP
(b) Contractionary Policy
Copyright © 2003 South-Western/Thomson Publishing. All rights reserved.
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