Transcript O`Sullivan, Sheffrin, Perez: Economics: Principles, Applications, and

10
Fiscal Policy
THE ROLE OF FISCAL POLICY
• fiscal policy
Changes in government taxes and
spending that affect the level of GDP.
• expansionary policies
Government policy actions that lead
to increases in aggregate demand.
Examples:
• contractionary policies
Government policy actions that lead
to decreases in aggregate demand.
Examples:
THE ROLE OF FISCAL POLICY
Fiscal Policy and Aggregate Demand
▼ Fiscal Policy in Action
Long-run AS
Long-run AS
THE ROLE OF FISCAL POLICY
The Limits to Stabilization Policy
• stabilization policies
Policy actions taken to move the economy
closer to full employment or potential output.
LAGS
Possible Pitfalls in Stabilization Policy
THE ROLE OF FISCAL POLICY
The Limits to Stabilization Policy
LAGS
• inside lags
The time it takes to formulate a policy.
• outside lags
The time it takes for the policy to
actually work.
FORECASTING UNCERTAINTIES
THE FEDERAL BUDGET
Federal Spending
• discretionary spending
• entitlement and mandatory spending
The spending programs that Congress
Spending that Congress has authorized
authorizes on an annual basis.
by prior law, primarily providing support
for individuals.
THE FEDERAL BUDGET
Federal Spending
• Social Security
A federal government program to
provide retirement support and a
host of other benefits.
• Medicare
A federal government health program
for the elderly.
• Medicaid
A federal and state government health
program for the poor.
THE FEDERAL BUDGET
The Federal Deficit and Fiscal Policy
• budget deficit
The amount by which government
spending exceeds revenues in a
given year.
• budget surplus
The amount by which government
revenues exceed government
expenditures in a given year.
THE FEDERAL BUDGET
Automatic Stabilizers
The increased federal budget deficit works through three channels:
1
Increased transfer payments such as unemployment insurance, food stamps,
and other welfare payments increase the income of some households, partly
offsetting the fall in household income.
2
Other households whose incomes are falling pay less in taxes, which partly
offsets the decline in their household income. Because incomes do not fall as
much as they would have in the absence of the deficit, consumption spending
does not decline as much.
3
Because the corporation tax depends on corporate profits and profits fall in a
recession, taxes also fall on businesses. Lower corporate taxes help to prevent
businesses from cutting spending as much as they would otherwise during a
recession.
• automatic stabilizers
Taxes and transfer payments that
stabilize GDP without requiring
policy makers to take explicit action.
• permanent income
An estimate of a household’s long-run
average level of income.
FISCAL POLICY IN U.S. HISTORY
The Depression Era
The Kennedy Administration
The Vietnam War Era
The Reagan Administration