Transcript Macro Chapter 12

Macro Chapter 11
Fiscal Policy: The Keynesian View
and Historical Perspective
Important Note about the
Chapter:
Only read up to p.245 then stop at the
section titled “The Keynesian Aggregate
Expenditure Model”
Nothing from that section will be on a quiz
or exam
6 Learning Goals
1) List the key arguments in Keynesian
Economics
2) Describe the multiplier process then identify
potential problems with the process
3) Define a budget surplus and deficit
4) Differentiate between restrictive and
expansionary fiscal policy
5) Explain how fiscal policy is implemented
6) Discover timing issues related to fiscal policy
The Great Depression and
the Macroadjustment
Process
Watch video: History Channel FDR 1Depression and 1932 election
John M. Keynes
Incredibly influential economist
Major points of thinking:
1. Resource prices and interest rates are
not very flexible so they won’t direct an
economy to equilibrium
2. Changes in output will direct an
economy to equilibrium
John M. Keynes
1935, about his forthcoming book The General
Theory of Employment, Interest and Money
“I believe myself to be
writing a book on
economic theory which
will largely revolutionize
not, I suppose, at once
but in the course of the
next ten years the way
the world thinks about
economic problems.”
Friedrich Hayek
1944, The Road to Serfdom
According to the views now dominant,
the question is no longer how we can
make the best use of the spontaneous
forces found in a free society. We
have in effect undertaken to dispense
with the forces which produced
unforeseen results and to replace the impersonal and
anonymous mechanism of the market by collective and
"conscious" direction of all social forces to deliberately
chosen goals.
Watch video: Commanding Heights 1Keynes vs Hayek
For more about Keynes &
Hayek:
See Supplemental Video Free to Choose
(FTC) Keynesian economics
If you really want details, see
supplemental videos Commanding
Heights 1, Chapters 1 through 8
Output, Employment, and
Keynesian Economics
The Solution?
Y=C+I+G+X
If C, I, and X are stagnant or declining,
increase G
After the multiplier kicks in, C, I, and X will
increase
AD shifts right until full employment is
reached
This is not ancient economic
theory
Watch video: President Obama- only
government can break cycle
What is the multiplier and how does
it work?
The idea behind the multiplier is that
spending by one person results in income
for another, which will create additional
spending and additional income for others.
Q11.1 A hail storm that breaks lots of windows in
buildings is
25%
1
25%
2
25%
3
25%
4
What are some problems
associated with the multiplier?
Watch video: Stossel Macro Clip 04government spending, jobs and
unemployment
Q11.2 Within the Keynesian model, the multiplier
effect tends to
1. smooth out the up- and down- swings of the
business cycle.
2. promote price stability.
3. magnify small changes in spending into much
larger changes in output and employment.
4. reduce the impact of an increase in investment
on output and employment.
Key Points:
The multiplier “works” with an increase in
C, I, G, or X
The multiplier is more potent when
1. Unemployment is unusually high
2. There is an increase in C, I, or X
The multiplier is less potent when
1. Unemployment is closer to natural rate
2. There is an increase in G (because of
secondary effects)
Note:
You do not need to remember the formula
for the multiplier
No quiz or exam questions will ask you to
calculate the multiplier or know the
relationship between MPC and M
The Keynesian View of
Fiscal Policy
What is fiscal policy?
Fiscal policy is simply the tools used by
Congress and the President to alter
economic activity
Primary tools are government spending
and taxes
Let’s investigate where government
gets its revenue
Watch video: Stossel Macro Clip 12- is
government too big
Sources of Government Revenue
Personal
income
45.4%
Payroll
35.7%
Other
3.0%
Corporate
income 12.1%
Customs
Excise duties 1.1%
2.7%
Federal government revenue
2008 -- $ 2,524 billion
Property
13.1 %
Interest
earnings
2.6%
Sales &
excise
15.1%
User charges
19.7%
Personal
income
9.8%
Corporate
income
1.9%
Other
21.3%
From Federal
government 16.5%
State & local government revenue
2006 -- $ 2,737 billion
Let’s investigate where government
spends its revenue
Q11.3 (PMA) What is the difference between the
national deficit and the debt?
1.
2.
3.
4.
5.
The deficit is a yearly amount
The debt is a yearly amount
The deficit is a cumulative amount
The debt is a cumulative amount
The deficit is the difference between exports
and imports
6. The debt is the difference between revenues
and imports
What’s the difference between the
deficit and national debt?
Deficit is a yearly amount
Debt is the cumulative amount
Who does the U.S. owe?
See national debt clock
http://www.usdebtclock.org
How does fiscal policy work?
Increase gov’t spending and/or decrease taxes
– Expansionary- try to increase AD
Decrease gov’t spending and/or increase taxes
– Restrictive- try to decrease AD
Watch video to put federal budget in
perspective: 10,000 Pennies- budget cuts
Q11.4 According to Keynesian theory, which of the
following would most likely stimulate an expansion
in real output if the economy were in a recession?
1.
2.
3.
4.
an increase in tax rates
a balanced budget
a budget deficit
a budget surplus
Q11.5 The government is pursuing an
expansionary fiscal policy if it
1. decreases government spending and/or
increases taxes.
2. increases government spending and/or
increases taxes.
3. decreases government spending and/or
reduces taxes.
4. increases government spending and/or
reduces taxes.
Watch video to put federal budget in
perspective (warning- this is politicized but
effectively makes a point): 10,000
Pennies- national debt road trip
Fiscal Policy Changes
and Problems of Timing
What are some common problems
of fiscal policy?
Even if you believe fiscal policy works,
there are still some potential problems
Let’s say we want to “fix” the
economy. What problems might
we encounter?
First, we have a recognition lag
Second, we have an implementation lag
Third, we have an effectiveness lag
Note:
You do not need to know the details of
automatic stabilizers
Question Answers:
11.1 = 4
11.2 = 3
11.3 = 1 & 4
11.4 = 3
11.5 = 4