Transcript Embedded Tools of Fiscal Policy

The Embedded Tools of Fiscal
Policy
AP Macroeconomics
http://www.cartoonstock.com/newscartoons/cartoonists/ksc/lowres/kscn872l.jpg
Where we came from…
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In the previous lesson,
we learned about the
two primary fiscal
policy tools of
government, and their
affect on real GDP.
We practiced
manipulating the tools
of fiscal policy and
analyzing scenarios to
determine appropriate
fiscal policy.
http://usa.usembassy.de/economy-policy.htm
Where are we going?
In this lesson, you’ll
learn about the tools
embedded in the
economy that
respond to different
phases of the
business cycle.
These tools are
called “automatic
stabilizers”
http://www.languageguide.org/images/im/tools.png
Why are they automatic stabilizers?
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Do we put the economy on autopilot, and leave it to the automatic
stabilizers?
They adjust without
action by Congress or
the president
They serve as
stabilizers because
they limit the increase
in real GDP during
expansions and
reduce the decrease
in real GDP during a
recession.
http://blog-pfm.imf.org/pfmblog/2009/02/whither-the-automatic-stabilizers.html
Here are some examples of automatic
stabilizers:
1) Income tax system
2) Unemployment compensation
3) Stock and bond returns
Income tax system…
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As an individual’s
nominal income
increases, he or she
moves into higher tax
brackets and pays
more taxes, thus
limiting the increase in
disposable income.
http://www.apfn.org/apfn/tax.htm
Unemployment compensation…
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http://www.tumblr.com/tagged/unemployment-rates
When people are
unemployed, their income
does not fall to zero – if this
were the case, the impact
on the economy would be
negative. Rather, the
negative impact on real
GDP is diminished by
unemployment
compensation, which
provides a base level of
income.
Stock and bond returns…
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Many corporations establish
the dividends they pay on
shares of stock and maintain
this payout for several years.
As a result, dividends do not
follow the swings of the
business cycle.
Bond payments are
established at the same time
the bond is issued and remain
throughout the life of the bond.
http://onceusave.com/stocks-are-a-great-buy/
What is Discretionary Fiscal Policy?
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Policy that is the direct
result of deliberate
actions by policy
makers (Krugman, p.
212)
And now…
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Some resources:
http://www.reffonomics.com/
Morton workbook Activity 30
Works Cited
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Economics of Seinfeld.
http://yadayadayadaecon.com/clip/46/
Krugman, Paul, and Robin Wells. Krugman’s
Economics for AP. New York: Worth
Publishers.
Morton, John S. and Rae Jean B. Goodman.
Advanced Placement Economics: Teacher
Resource Manual. 3rd ed. New York: National
Council on Economic Education, 2003. Print.
Reffonomics. www.reffonomics.com.