Transcript Chapter 15: Fiscal Policy

Fiscal Policy
Fiscal policy Changes in federal taxes
and purchases that are intended to achieve
macroeconomic policy objectives, such as high
employment, price stability, and high rates of
economic growth.
Chapter 15: Fiscal Policy
Automatic Stabilizers versus Discretionary Fiscal Policy
Automatic stabilizers Government
spending and taxes that automatically
increase or decrease along with the
business cycle.
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An Overview of Government Spending and Taxes
Chapter 15: Fiscal Policy
The Federal Government’s Share
of Total Government
Expenditures, 1929–2006
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An Overview of Government Spending and Taxes
Chapter 15: Fiscal Policy
Federal Purchases and
Federal Expenditures as a
Percentage of GDP, 1950–2006
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Fiscal Policy
An Overview of Government Spending and Taxes
Chapter 15: Fiscal Policy
Federal Government
Expenditures, 2006
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Fiscal Policy
An Overview of Government Spending and Taxes
Chapter 15: Fiscal Policy
Federal Government
Revenue, 2006
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The Effects of Fiscal Policy
on Real GDP and the Price Level
Looks a lot like expansionary and contractionary monetary policy
…except for impacts on interest rates and investment spending
Chapter 15: Fiscal Policy
Fiscal Policy
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The Effects of Fiscal Policy
on Real GDP and the Price Level
A Summary of How Fiscal Policy Affects Aggregate Demand
Chapter 15: Fiscal Policy
Countercyclical Fiscal Policy
ACTIONS BY CONGRESS
AND THE PRESIDENT
RESULT
PROBLEM
TYPE OF POLICY
Recession
Expansionary
Increase government
spending or cut taxes
Real GDP and the
price level rise.
Rising
Inflation
Contractionary
Decrease government
spending or raise taxes
Real GDP and the
price level fall.
Don’t Let This Happen to YOU!
Don’t Confuse Fiscal Policy and Monetary Policy
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The Government Purchases and Tax Multipliers
FIGURE 15.8
Chapter 15: Fiscal Policy
The Multiplier Effect
and Aggregate Demand
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Learning Objective 15.3
The Government Purchases and Tax Multipliers
Chapter 15: Fiscal Policy
The Multiplier Effect
of an Increase in
Government Purchases
This spending multiplier is analogous
but not the same as the deposit multiplier
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The Government Purchases and Tax Multipliers
A cut in tax rates affects equilibrium real GDP through two
channels:
Chapter 15: Fiscal Policy
(1) A cut in tax rates increases the disposable income of
households, which leads them to increase their
consumption spending, and
(2) a cut in tax rates increases the size of the multiplier effect
… it reduces the rate at which purchasing power leaks from
the spending stream
The less the marginal propensity to leak, the greater the
spending multiplier.
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The Government Purchases and Tax Multipliers
Taking into Account the Effects of Aggregate Supply
Chapter 15: Fiscal Policy
The Multiplier Effect
and Aggregate Supply
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The Limits of Using Fiscal Policy Crowding out A decline in
private expenditures as a
to Stabilize the Economy
result of an increase in
government purchases.
Money market
Chapter 15: Fiscal Policy
An Expansionary Fiscal Policy
Increases Interest Rates
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The Limits of Using Fiscal Policy
to Stabilize the Economy
Crowding Out in the Short Run
FIGURE 15.12
Chapter 15: Fiscal Policy
The Effect of Crowding Out
in the Short Run
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The Effects of Fiscal Policy in the Long Run
The Economic Effect of “Supply Side” Tax Reform
Chapter 15: Fiscal Policy
The Supply-Side Effects
of a Tax Change
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Deficits, Surpluses, and Federal Government Debt
Chapter 15: Fiscal Policy
The Federal Budget Deficit,
1901–2006
Cyclically adjusted budget deficit
or surplus The deficit or surplus in
the federal government’s budget if
the economy were at potential GDP.
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Making
the
Connection
Did Fiscal Policy Fail during
the Great Depression?
Chapter 15: Fiscal Policy
FEDERAL
GOVERNMENT
EXPENDITURES
(BILLIONS OF
DOLLARS
Although government
spending increased during
the Great Depression, the
cyclically adjusted budget
was in surplus most years.
ACTUALFEDERAL
BUDGET DEFICIT
OR SURPLUS
(BILLIONS OF
DOLLARS)
CYCLICALLY
ADJUSTED
BUDGET DEFICIT
OR SURPLUS
(BILLIONS OF
DOLLARS)
CYCLICALLY
ADJUSTED
BUDGET DEFICIT
OR SURPLUS AS
A PERCENTAGE
OF GDP
1929
$2.6
$1.0
$1.24
1.20%
1930
2.7
0.2
0.81
0.89
1931
4.0
-2.1
-0.41
-0.54
1932
3.0
-1.3
0.50
0.85
1933
3.4
-0.9
1.06
1.88
1934
5.5
-2.2
0.09
0.14
1935
5.6
-1.9
0.54
0.74
1936
7.8
-3.2
0.47
0.56
1937
6.4
0.2
2.55
2.77
1938
7.3
-1.3
2.47
2.87
1939
8.4
-2.1
2.00
2.17
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Deficits, Surpluses, and Federal Government Debt
The Federal Government Debt
Chapter 15: Fiscal Policy
The Federal Government
Debt, 1901–2006
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Chapter 15: Fiscal Policy
Key Terms
Automatic stabilizers
Budget deficit
Budget surplus
Crowding out
Cyclically adjusted budget
deficit or surplus
Fiscal policy
Multiplier effect
Tax wedge
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