Chapter 15: Fiscal Policy © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard,...
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Transcript of Chapter 15: Fiscal Policy © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard,...
![Page 1: Chapter 15: Fiscal Policy © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 1 of 46 Fiscal policy Changes.](https://reader036.fdocuments.in/reader036/viewer/2022062421/56649d7d5503460f94a5f9ec/html5/thumbnails/1.jpg)
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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 1 of 46
Fiscal policy Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives, such as high employment, price stability, and high rates of economic growth.
Fiscal Policy
Automatic stabilizers Government spending and taxes that automatically increase or decrease along with the business cycle.
Automatic Stabilizers versus Discretionary Fiscal Policy
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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 2 of 46
An Overview of Government Spending and Taxes
The Federal Government’s Share of Total Government Expenditures, 1929–2006
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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 3 of 46
An Overview of Government Spending and Taxes
Federal Purchases and Federal Expenditures as a Percentage of GDP, 1950–2006
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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 4 of 46
Fiscal Policy
An Overview of Government Spending and Taxes
Federal Government Expenditures, 2006
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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 5 of 46
Fiscal Policy
An Overview of Government Spending and Taxes
Federal Government Revenue, 2006
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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 6 of 46
The Effects of Fiscal Policyon Real GDP and the Price Level
Fiscal Policy
Looks a lot like expansionary and contractionary monetary policy
…except for impacts on interest rates and investment spending
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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 7 of 46
A Summary of How Fiscal Policy Affects Aggregate Demand
Countercyclical Fiscal Policy
PROBLEM TYPE OF POLICYACTIONS BY CONGRESS AND THE PRESIDENT RESULT
Recession Expansionary Increase government spending or cut taxes
Real GDP and the price level rise.
Rising Inflation
Contractionary Decrease government spending or raise taxes
Real GDP and the price level fall.
The Effects of Fiscal Policyon Real GDP and the Price Level
Don’t Let This Happen to YOU!Don’t Confuse Fiscal Policy and Monetary Policy
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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 8 of 46
The Government Purchases and Tax Multipliers
FIGURE 15.8
The Multiplier Effect and Aggregate Demand
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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 9 of 46
Learning Objective 15.3
The Government Purchases and Tax Multipliers
The Multiplier Effect of an Increase in Government Purchases
This spending multiplier is analogous
but not the same as the deposit multiplier
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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 10 of 46
The Government Purchases and Tax Multipliers
A cut in tax rates affects equilibrium real GDP through two channels:
(1) A cut in tax rates increases the disposable income of households, which leads them to increase their consumption spending, and
(2) a cut in tax rates increases the size of the multiplier effect … it reduces the rate at which purchasing power leaks from the spending stream
The less the marginal propensity to leak, the greater the spending multiplier.
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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 11 of 46
Taking into Account the Effects of Aggregate Supply
The Government Purchases and Tax Multipliers
The Multiplier Effect and Aggregate Supply
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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 12 of 46
The Limits of Using Fiscal Policyto Stabilize the Economy
An Expansionary Fiscal Policy Increases Interest Rates
Crowding out A decline in private expenditures as a result of an increase in government purchases.Money market
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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 13 of 46
The Limits of Using Fiscal Policyto Stabilize the Economy
Crowding Out in the Short Run
FIGURE 15.12
The Effect of Crowding Out in the Short Run
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The Effects of Fiscal Policy in the Long Run
The Economic Effect of “Supply Side” Tax Reform
The Supply-Side Effects of a Tax Change
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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 15 of 46
Deficits, Surpluses, and Federal Government Debt
The Federal Budget Deficit, 1901–2006
Cyclically adjusted budget deficit or surplus The deficit or surplus in the federal government’s budget if the economy were at potential GDP.
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Did Fiscal Policy Fail during the Great Depression?
Makingthe
Connection
Although government spending increased during the Great Depression, the cyclically adjusted budget was in surplus most years.
FEDERAL GOVERNMENT
EXPENDITURES (BILLIONS OF
DOLLARS
ACTUALFEDERAL BUDGET DEFICIT
OR SURPLUS (BILLIONS OF
DOLLARS)
CYCLICALLY ADJUSTED
BUDGET DEFICIT OR SURPLUS (BILLIONS OF
DOLLARS)
CYCLICALLY ADJUSTED
BUDGET DEFICIT OR SURPLUS AS A PERCENTAGE
OF GDP
1929 $2.6 $1.0 $1.24 1.20%
1930 2.7 0.2 0.81 0.89
1931 4.0 -2.1 -0.41 -0.54
1932 3.0 -1.3 0.50 0.85
1933 3.4 -0.9 1.06 1.88
1934 5.5 -2.2 0.09 0.14
1935 5.6 -1.9 0.54 0.74
1936 7.8 -3.2 0.47 0.56
1937 6.4 0.2 2.55 2.77
1938 7.3 -1.3 2.47 2.87
1939 8.4 -2.1 2.00 2.17
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Deficits, Surpluses, and Federal Government Debt
The Federal Government Debt
The Federal Government Debt, 1901–2006
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K e y T e r m s
Automatic stabilizers
Budget deficit
Budget surplus
Crowding out
Cyclically adjusted budget
deficit or surplus
Fiscal policy
Multiplier effect
Tax wedge