Fiscal Policy and the AD-AS Model Real Domestic Output, GDP Price Level AD 2 Recessions Decrease...
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![Page 1: Fiscal Policy and the AD-AS Model Real Domestic Output, GDP Price Level AD 2 Recessions Decrease Aggregate Demand AD 1 $5 Billion Additional Spending.](https://reader038.fdocuments.in/reader038/viewer/2022110210/56649eb65503460f94bbf815/html5/thumbnails/1.jpg)
Fiscal Policy and theAD-AS Model
Real Domestic Output, GDP
Pri
ce L
evel
AD2
RecessionsDecreaseAggregateDemand
AD1
$5 Billion AdditionalSpending
Full $20 Billion Increase in
Aggregate Demand
AS
$490 $510
P1
Expansionary Fiscal Policy
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Fiscal Policy and theAD-AS Model
Real Domestic Output, GDP
Pri
ce L
evel
AD3
RecessionsDecreaseAggregateDemand
AD4
$5 Billion Initial Decrease
In Spending
Full $20 Billion Decrease in
Aggregate Demand
AS
$510 $522
P1
Contractionary Fiscal Policy
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Pop Quiz
1. To fight a recession, the government should ______ taxes and _____ government spending.
2. This expansionary policy could create a budget _________ and may __________interest rates as the government has to borrow more. This is known as the _______________________.
3. Everybody knows that if interest rates go up this will __________ foreign financial investment in the U.S. causing the dollar to _______________ in foreign exchange markets and causing net exports to go __________
lower
Increase
Deficit Increase
Crowding out effect
increase
Appreciate
Down!
![Page 4: Fiscal Policy and the AD-AS Model Real Domestic Output, GDP Price Level AD 2 Recessions Decrease Aggregate Demand AD 1 $5 Billion Additional Spending.](https://reader038.fdocuments.in/reader038/viewer/2022110210/56649eb65503460f94bbf815/html5/thumbnails/4.jpg)
Pop Quiz
1. To fight a recession, the government should ______ taxes and _____ government spending.
2. This expansionary policy could create a budget _________ and may __________interest rates as the government has to borrow more. This is known as the _______________________.
3. Everybody knows that if interest rates go up this will __________ foreign financial investment in the U.S. causing the dollar to _______________ in foreign exchange markets and causing net exports to go __________
lower
Increase
Deficit Increase
Crowding out effect
increase
Appreciate
Down!
![Page 5: Fiscal Policy and the AD-AS Model Real Domestic Output, GDP Price Level AD 2 Recessions Decrease Aggregate Demand AD 1 $5 Billion Additional Spending.](https://reader038.fdocuments.in/reader038/viewer/2022110210/56649eb65503460f94bbf815/html5/thumbnails/5.jpg)
Pop Quiz
1. To fight a recession, the government should ______ taxes and _____ government spending.
2. This expansionary policy could create a budget _________ and may __________interest rates as the government has to borrow more. This is known as the _______________________.
3. Everybody knows that if interest rates go up this will __________ foreign financial investment in the U.S. causing the dollar to _______________ in foreign exchange markets and causing net exports to go __________
lower
Increase
Deficit Increase
Crowding out effect
increase
Appreciate
Down!
![Page 6: Fiscal Policy and the AD-AS Model Real Domestic Output, GDP Price Level AD 2 Recessions Decrease Aggregate Demand AD 1 $5 Billion Additional Spending.](https://reader038.fdocuments.in/reader038/viewer/2022110210/56649eb65503460f94bbf815/html5/thumbnails/6.jpg)
Pop Quiz
1. To fight inflation, the government should ______ taxes and _____ government spending.
2. This contractionary policy could create a budget _________ and may __________interest rates as the demand for borrowed funds goes __________.
3. Everybody knows that if interest rates go down this will __________ foreign financial investment in the U.S. causing the dollar to _______________ in foreign exchange markets and causing net exports to go __________
4. This net export effect (compliments/offsets) the contractionary effort. _____________
increase
decrease
surplus decrease
decreasedepreciate
Up.
down
offsets
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“Ten Things To Know About The Federal Budget”
1. The 2009 federal budget will start on ______________ and end on ________________.
2. What do economists like to compare a budget deficit to when determining its relative size?
3. Has federal spending grown in the last 50 years?
Oct. 1, 2008
September 30, 2009
The deficit as a percentage of GDP
Nominally yes, but is still between 18-20% of total spending
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4. According to the reading, what percent of federal spending goes to defense? How much of our GDP does that represent?
5. What trade-off is involved in the growing size of entitlement programs?
6. What, if anything, is disturbing about financing some of our debt with our buddies in China and Japan?
20% or 4 % of our GDP
Less discretionary spending
Factor income leaving the country/transfers economic resources abroad
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DEFICITS, SURPLUSES, AND DEBT
Definitions:•Budget Deficit•Budget Surplus•National or Public Debt•U.S. Securities
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Causes:• Wars• Recessions• Tax Cuts
THE PUBLIC DEBTFacts and Figures:
Quantitative Aspects• Debt and GDP• International Comparisons• Interest Charges• Ownership
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0 20 40 60 80 100 120 140
ItalyJapan
BelgiumCanada
SpainFrance
GermanyUnited States
NetherlandsFinlandSweden
DenmarkUnited Kingdom
Australia
GLOBAL PERSPECTIVEPublic Sector Debt as a percent of GDP,2000
Source: Organization for Economic Cooperation and Development
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Social Security Considerations• Social Security Trust Fund
THE PUBLIC DEBT
False Concerns• Bankruptcy
• Refinancing• Taxation
• Burdening Future Generations
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OWNERSHIP OF THE PUBLIC DEBT
9%
28%
11%
22%
13%17%
Debt heldBy FederalReserve &
GovernmentAgencies
Debt heldOutside the
FederalReserve &
GovernmentAgencies
Federal Reserve
U.S.Government
Agencies
Other, IncludingState & Local Governments
U.S. Banks & FinancialInstitutions
ForeignOwnership
U.S. Individuals
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ID1
Investment (billions of dollars)
Re
al i
nte
res
t ra
te (
pe
rcen
t)
THE CROWDING OUT EFFECTWith a Deficit,An Increase in
InvestmentDemand Causes…
16
14
12
10
8
6
4
2
05 10 15 20 25 30 35 40
ID2Crowding
OutEffect
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DEFICITS AND SURPLUSES1990 - 2010
Source: Economic Report of the President, 2001
$800
700
600
500
400
300
200
100
0
-100
-200
-300
Bu
dge
t D
efic
its
or S
urp
luse
s, B
illi
ons
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
ActualProjected (as of 2001)
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Federal Budget Deficits and Surpluses Actual and Projected, Fiscal 1992-2012
Source: Congressional Budget Office
$300
200
100
0
-100
-200
-300
-400
-500
Bu
dg
et D
efic
it (
-) o
r S
urp
lus,
Bill
ion
s
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Actual Projected (as of March 2006)
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Social Security Trust Fund(social insecurity )
• Many claim Social Security may go bankrupt soon due to
• BABY BOOM Retirement
1st Boomer Retires
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Ways to save Social Security
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Ways to save social security
1. Delay Retirement Age
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2. Means Test Only give it to those
who need it
3. Raise the social security tax
currently 6.2%
4. Increase maximum amount of income that can be taxed (cap)…currently the income max is $97,500
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5. Reduce Benefits
6. Privatize Accounts
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Built-In Stability
G
T
Deficit
Surplus
GDP1 GDP2 GDP3
Real Domestic Output, GDP
Go
vern
men
t E
xpen
ses,
Gan
d T
ax R
even
ues
, T
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Standardized Budget versus the Actual Budget
• The Standardized Budget…• measures the Federal budget deficit or surplus that
would occur if the economy operated at full employment throughout the year. (full employment budget)
• Cyclical deficits or surpluses are those that result from changes in GDP. (actual deficits/surpluses that occur automatically)
• Changes in the standardized deficit or surplus indicate whether the government is engaging in expansionary or contractionary fiscal policy.
• Changes in the actual budget deficit or surplus do not since the deficits or surpluses can include cyclical deficits or surpluses
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(1)Year
(2)Actual
Deficit (-) orSurplus (+)
(3)StandardizedDeficit (-) orSurplus (+)
Recent U.S. Fiscal Policy
1990199119921993199419951996199719981999200020012002200320042005
-3.9%-4.4%-4.5%-3.8%-2.9%-2.2%-1.4%-0.3%+0.8%+1.4%+2.5%+1.3%-1.5%-3.4%-3.5%-2.6%
-2.2%-2.5%-2.9%-2.9%-2.1%-2.0%-1.2%-1.0%-0.4%+0.1%+1.1%+1.1%-1.1%-2.7%-2.4%-1.8%
Federal Deficits and Surpluses – 1990 - 2005 as a Percentage of Potential GDP
Source: Congressional Budget Office
Expansionary