ap eco chap12 fiscal policy

12 - 1Copyright McGraw-Hill/Irwin, 2002

Legislative Mandate

Fiscal Policy and the AD-AS Model

Expansionary and Contractionary Fiscal Policy

Financing of Deficits and Disposing of Surpluses

Built-In Stability

Evaluating Fiscal Policy

Fiscal Policy in the Open Economy

Supply-Side Fiscal Policy

Forecasting the Future

Key Terms

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FISCALPOLICY

12C H A P T E R

http://www.mhhe.com/cgi-bin/mcbrue15.pl?url=origin12-1


Legislative Mandate




Built-In Stability





Key Terms

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LEGISLATIVE MANDATES

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



Legislative Mandate




Built-In Stability





Key Terms

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FISCAL POLICY AND THE AD-AS MODEL

Two Options• Discretionary Fiscal Policy • Non-Discretionary Fiscal

PolicyExpansionary Fiscal Policy• Increase Government

Spending• Tax Reductions• Combinations of the Two



Legislative Mandate




Built-In Stability





Key Terms

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Pri

ce le

vel

Real GDP (billions)

EXPANSIONARY FISCAL POLICY

Full $20 billionincrease in aggregatedemand

AD2AD1

$5 billion initialincrease in spending

the multiplier at work...

P1

$485 $505



Legislative Mandate




Built-In Stability





Key Terms

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Pri

ce le

vel

Real GDP (billions)

CONTRACTIONARY FISCAL POLICY

the multiplier at work...

P3

$515

Full $20 billiondecrease in aggregatedemand

AD4

AD3

$5 billion initialdecrease in spending

P4



Legislative Mandate




Built-In Stability





Key Terms

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FINANCING OF DEFICITS ANDDISPOSING OF SURPLUSES

•Borrowing vs. New Money•Borrowing From The Public•Money Creation

•Debt Retirement vs. Idle Surplus•Debt Reduction•Impounding

Which Policy Option? G or T?



Legislative Mandate




Built-In Stability





Key Terms

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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



Legislative Mandate




Built-In Stability





Key Terms

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BUILT-IN STABILITY

GDP1 GDP2 GDP3

Real Domestic Output, GDP

Gov

ern

men

t E

xpen

dit

ure

s,G

, an

d T

ax R

even

ues

, T

Deficit

Surplus

T

G



Legislative Mandate




Built-In Stability





Key Terms

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BUILT-IN STABILITY

Tax Progressivity• Progressive Tax System• Proportional Tax System• Regressive Tax System

The more progressive the tax system, the greater the economy’s built-in stability



Legislative Mandate




Built-In Stability





Key Terms

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EVALUATING FISCAL POLICY

Full-Employment BudgetCyclical DeficitRecent U.S. Deficits & Surpluses

Year

ActualDeficit orSurplus

Full-EmploymentDeficit orSurplus

19901991199219931994199519961997199819992000

-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



Legislative Mandate




Built-In Stability





Key Terms

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FULL-EMPLOYMENT DEFICITS

GDP2 GDP1


Gov

ernm

ent

Exp

endi

ture

s,G

, and

Tax

Rev

enue

s, T

(bi

llio

ns)

G

T1

Year 1Year 2

ab

c$500 475 450 425

No Change inFiscal Policy



Legislative Mandate




Built-In Stability





Key Terms

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FULL-EMPLOYMENT DEFICITS

GDP4 GDP3


Gov

ernm

ent

Exp

endi

ture

s,G

, and

Tax

Rev

enue

s, T

(bi

llio

ns) T2

G

T1

Year 3Year 4

de

f$500 475 450 425

DiscretionaryFiscal PolicyTax Decrease

h

g



Legislative Mandate




Built-In Stability





Key Terms

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-8 -6 -4 -2 0 2 4

DenmarkCanadaSweden

United KingdomUnited States

GermanyItaly

FranceCzech Republic

HungaryJapan

GLOBAL PERSPECTIVEBUDGET DEFICITS OR SURPLUSESAS A PERCENTAGE OF GDP, 1999

Source: Organization for Economic Development and Cooperation



Legislative Mandate




Built-In Stability





Key Terms

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PROBLEMS, CRITICISMS,AND COMPLICATIONS

•Problems of Timing•Recognition Lag•Administrative Lag•Operational Lag

•A Political Business Cycle?•Offsetting State & Local Finance

•Crowding-Out Effect



Legislative Mandate




Built-In Stability





Key Terms

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FISCAL POLICY, AGGREGATE SUPPLY AND INFLATION

Pric

e le

vel

Real GDP (billions)

AS

AD2

$495 $515

P1

AD1

Fiscal Policy:Pure & Simple



Legislative Mandate




Built-In Stability





Key Terms

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Pric

e le

vel

Real GDP (billions)

AS

AD’2

$495 $515

P1

AD1 Fiscal Policyand the

Crowding-OutEffect or theNet Export

Effect

$505

AD2



Legislative Mandate




Built-In Stability





Key Terms

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Pric

e le

vel

Real GDP (billions)

AS

AD2

$495 $515

P1

AD1

Fiscal PolicyAnd Inflation

$505



Legislative Mandate




Built-In Stability





Key Terms

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FISCAL POLICY IN THEOPEN ECONOMY

Shocks Originating from Abroad

Net Export Effect



Legislative Mandate




Built-In Stability





Key Terms

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SUPPLY-SIDE FISCAL POLICY

Emphasis on Expansionary Tax Cuts

Impact upon...• Saving and Investment

• Work Incentives

• Risk Taking



Legislative Mandate




Built-In Stability





Key Terms

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SUPPLY-SIDE FISCAL POLICY

0

Pri

ce le

vel

Real domestic output, GDP

AD1

AD2

AS1 AS2

P1

P2

P3

Q1 Q2 Q3



Legislative Mandate




Built-In Stability





Key Terms

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Forecasting the FutureThe Leading Indicators

• Average Workweek• Initial Claims for Unemployment

Insurance• New Orders for Consumer Goods• Vendor Performance• New Orders for Capital Goods• Building Permits for Houses• Stock Prices• Money Supply• Interest-Rate Spread• Consumer Expectations



Legislative Mandate




Built-In Stability





Key Terms

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Forecasting the FutureThe Leading Indicators

• Average Workweek• Initial Claims for Unemployment

Insurance• New Orders for Consumer Goods• Vendor Performance• New Orders for Capital Goods• Building Permits for Houses• Stock Prices• Money Supply• Interest-Rate Spread• Consumer Expectations

ChapterConclusions


ENDBACK

fiscal policy

Employment Act of 1946

Council of Economic Advisers (CEA)

expansionary fiscal policy

budget deficit

contractionary fiscal policy

budget surplus

built-in stabilizer

progressive tax system

proportional tax system

regressive tax system

full-employment budget

cyclical deficit

political business cycle

crowding-out effect

net export effect

supply-side fiscal policy

Copyright McGraw-Hill/Irwin, 2002


Legislative Mandate




Built-In Stability





Key Terms

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Chapter 13

Moneyand

BankingNext...