Ap Eco Chap12 Fiscal Policy

FISCAL POLICY 12 C H A P T E R

LEGISLATIVE MANDATES Employment Act of 1946 Council of Economic Advisors (CEA) Joint Economic Committee (JEC)

FISCAL POLICY AND THE AD-AS MODEL Two Options ,[object Object],[object Object],Expansionary Fiscal Policy ,[object Object],[object Object],[object Object]

Price level Real GDP (billions) EXPANSIONARY FISCAL POLICY Full $20 billion increase in aggregate demand AD 2 AD 1 $5 billion initial increase in spending the multiplier at work... P 1 $485 $505

Price level Real GDP (billions) CONTRACTIONARY FISCAL POLICY the multiplier at work... P 3 $515 Full $20 billion decrease in aggregate demand AD 4 AD 3 $5 billion initial decrease in spending P 4

FINANCING OF DEFICITS AND DISPOSING OF SURPLUSES ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Which Policy Option? G or T?

BUILT-IN STABILITY Net tax revenues vary directly with GDP Transfer payments behave the opposite way as tax collections Automatic or Built-In Stabilizers Economic Importance

BUILT-IN STABILITY GDP 1 GDP 2 GDP 3 Real Domestic Output, GDP Government Expenditures, G, and Tax Revenues, T Deficit Surplus T G

BUILT-IN STABILITY ,[object Object],[object Object],[object Object],[object Object],The more progressive the tax system, the greater the economy’s built-in stability

EVALUATING FISCAL POLICY Full-Employment Budget Cyclical Deficit Recent U.S. Deficits & Surpluses Year Actual Deficit or Surplus Full-Employment Deficit or Surplus 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 -3.9% -4.5 -4.7 -3.9 -2.9 -2.2 -1.4 -0.3 +0.8 +1.4 +2.4 -2.1% -2.6 -3.0 -2.6 -2.0 -1.9 -1.2 -0.9 -0.4 +0.3 +1.1

FULL-EMPLOYMENT DEFICITS GDP 2 GDP 1 Real Domestic Output, GDP Government Expenditures, G, and Tax Revenues, T (billions) G T 1 Year 1 Year 2 a b c $500 475 450 425 No Change in Fiscal Policy

FULL-EMPLOYMENT DEFICITS GDP 4 GDP 3 Real Domestic Output, GDP Government Expenditures, G, and Tax Revenues, T (billions) T 2 G T 1 Year 3 Year 4 d e f $500 475 450 425 Discretionary Fiscal Policy Tax Decrease h g

-8 -6 -4 -2 0 2 4 Denmark Canada Sweden United Kingdom United States Germany Italy France Czech Republic Hungary Japan GLOBAL PERSPECTIVE BUDGET DEFICITS OR SURPLUSES AS A PERCENTAGE OF GDP, 1999 Source: Organization for Economic Development and Cooperation

PROBLEMS, CRITICISMS, AND COMPLICATIONS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

FISCAL POLICY, AGGREGATE SUPPLY AND INFLATION Price level Real GDP (billions) AS AD 2 $495 $515 P 1 AD 1 Fiscal Policy: Pure & Simple

FISCAL POLICY, AGGREGATE SUPPLY AND INFLATION Price level Real GDP (billions) AS AD’ 2 $495 $515 P 1 AD 1 Fiscal Policy and the Crowding-Out Effect or the Net Export Effect $505 AD 2

FISCAL POLICY, AGGREGATE SUPPLY AND INFLATION Price level Real GDP (billions) AS AD 2 $495 $515 P 1 AD 1 Fiscal Policy And Inflation $505

FISCAL POLICY IN THE OPEN ECONOMY Shocks Originating from Abroad Net Export Effect

SUPPLY-SIDE FISCAL POLICY Emphasis on Expansionary Tax Cuts Impact upon... ,[object Object],[object Object],[object Object]

SUPPLY-SIDE FISCAL POLICY 0 Price level Real domestic output, GDP AD 1 AD 2 AS 1 AS 2 P 1 P 2 P 3 Q 1 Q 2 Q 3

Forecasting the Future The Leading Indicators ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Forecasting the Future The Leading Indicators ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Chapter Conclusions

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],KEY TERMS END BACK Copyright McGraw-Hill/Irwin, 2002

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Ap Eco Chap12 Fiscal Policy

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