Ap Eco Chap12 Fiscal Policy
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Transcript of Ap Eco Chap12 Fiscal Policy
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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
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12 - 2Copyright 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
PreviousSlide
NextSlide
EndShow
LEGISLATIVE MANDATES
Employment Act of 1946Council of Economic Advisors (CEA)Joint Economic Committee (JEC)
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12 - 3Copyright 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
PreviousSlide
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EndShow
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
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12 - 4Copyright 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
PreviousSlide
NextSlide
EndShow
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
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12 - 5Copyright 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
PreviousSlide
NextSlide
EndShow
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
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12 - 6Copyright 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
PreviousSlide
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EndShow
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?
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12 - 7Copyright 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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EndShow
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
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12 - 8Copyright 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
PreviousSlide
NextSlide
EndShow
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
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12 - 9Copyright 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
PreviousSlide
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EndShow
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
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12 - 10Copyright 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
PreviousSlide
NextSlide
EndShow
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
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12 - 11Copyright 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
PreviousSlide
NextSlide
EndShow
FULL-EMPLOYMENT DEFICITS
GDP2 GDP1
Real Domestic Output, GDP
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
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12 - 12Copyright 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
PreviousSlide
NextSlide
EndShow
FULL-EMPLOYMENT DEFICITS
GDP4 GDP3
Real Domestic Output, GDP
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
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12 - 13Copyright 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
PreviousSlide
NextSlide
EndShow
-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
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12 - 14Copyright 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
PreviousSlide
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EndShow
PROBLEMS, CRITICISMS,AND COMPLICATIONS
•Problems of Timing•Recognition Lag•Administrative Lag•Operational Lag
•A Political Business Cycle?•Offsetting State & Local Finance
•Crowding-Out Effect
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12 - 15Copyright 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
PreviousSlide
NextSlide
EndShow
FISCAL POLICY, AGGREGATE SUPPLY AND INFLATION
Pric
e le
vel
Real GDP (billions)
AS
AD2
$495 $515
P1
AD1
Fiscal Policy:Pure & Simple
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12 - 16Copyright 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
PreviousSlide
NextSlide
EndShow
FISCAL POLICY, AGGREGATE SUPPLY AND INFLATION
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
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12 - 17Copyright 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
PreviousSlide
NextSlide
EndShow
FISCAL POLICY, AGGREGATE SUPPLY AND INFLATION
Pric
e le
vel
Real GDP (billions)
AS
AD2
$495 $515
P1
AD1
Fiscal PolicyAnd Inflation
$505
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12 - 18Copyright 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
PreviousSlide
NextSlide
EndShow
FISCAL POLICY IN THEOPEN ECONOMY
Shocks Originating from Abroad
Net Export Effect
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12 - 19Copyright 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
PreviousSlide
NextSlide
EndShow
SUPPLY-SIDE FISCAL POLICY
Emphasis on Expansionary Tax Cuts
Impact upon...• Saving and Investment
• Work Incentives
• Risk Taking
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12 - 20Copyright 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
PreviousSlide
NextSlide
EndShow
SUPPLY-SIDE FISCAL POLICY
0
Pri
ce le
vel
Real domestic output, GDP
AD1
AD2
AS1 AS2
P1
P2
P3
Q1 Q2 Q3
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12 - 21Copyright 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
PreviousSlide
NextSlide
EndShow
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
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12 - 22Copyright 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
PreviousSlide
NextSlide
EndShow
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
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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
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12 - 24Copyright 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
PreviousSlide
NextSlide
EndShow
Chapter 13
Moneyand
BankingNext...