Fiscal policy keynesians
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Transcript of Fiscal policy keynesians
John Maynard Keynes
John Maynard Keynes, (June 5, 1883 –
April 21, 1946) was a British economist
whose ideas had a major impact on
modern economic and political theory as
well as on many governments' fiscal
policies.
He is particularly remembered for
advocating interventionist government
policy, by which the government would
use fiscal and monetary measures to aim
to mitigate the adverse effects of
economic recessions, depressions and
booms. Economists consider him one of
the main founders of modern theoretical
macroeconomics. His popular expression
"In the long run we are all dead" is still
quoted.
Discretionary Fiscal Policy
Discretionary Fiscal Policy
The discretionary changes in government expenditures and/or taxes in order to achieve certain national economic goals is the realm of fiscal policy.
High employment (low unemployment)
Price stability
Economic growth
Improvement of international payments balance
Discretionary Fiscal Policy
(cont'd)
Fiscal Policy
The discretionary changing of government expenditures or
taxes to achieve national economic goals, such as high
employment with price stability
Discretionary Fiscal Policy
(cont'd)
An increase in government spending will stimulate
economic activity
Changes in government spending
Military spending
Education spending
Budgets for government agencies
Figure 13-1 Expansionary and
Contractionary Fiscal Policy:
Changes in Government Spending,
Panel (a)
If there is a recessionary gap
in panel (a), fiscal policy can
presumably increase
aggregate demand
Figure 13-1 Expansionary and
Contractionary Fiscal Policy:
Changes in Government Spending,
Panel (b)
If there is an inflationary gap,
fiscal policy can presumably
decrease aggregate demand
Figure 13-2 Contractionary and
Expansionary Fiscal Policy: Changes
in Taxes, Panel (a)• In panel (a), the economy is
initially at E1, where real GDP
exceeds long-run equilibrium
• Contractionary fiscal policy can
move aggregate demand to
AD2 via a tax increase
• A new equilibrium is at E2 at a
lower price level
• Real GDP is now consistent
with LRAS
Figure 13-2 Contractionary and
Expansionary Fiscal Policy: Changes
in Taxes, Panel (b)• In panel (b) with a
recessionary gap (in this case
$500 billion) taxes are cut
• AD1 moves to AD2
• The economy moves from E1
to E2, and real GDP is now at
$12 trillion per year
• We are at the long-run
equilibrium level
Discretionary Fiscal Policy
(cont'd)
Change in taxes
A rise in taxes causes a reduction in aggregate demand
because it can reduce consumption spending, investment
expenditures, and net exports.
Possible Offsets to Fiscal Policy
Fiscal policy does not operate in a vacuum and important questions must be answered.
How are expenditures financed and by whom?
If taxes are increased what does government do with the taxes?
What will happen if individuals worry about increases in future taxes?
Possible Offsets
to Fiscal Policy (cont'd)
Crowding-Out Effect
The tendency of expansionary fiscal policy to cause a
decrease in planned investment or planned consumption in
the private sector; this decrease normally results from the
rise of interest rates.
The Crowding-Out Effect
Expansionary policy causing
deficit spending initially shifts
from AD1 to AD2
Due to crowding out,
AD shifts inward to AD3
Equilibrium GDP
below full-employment
GDP—recessionary gap
Possible Offsets to Fiscal Policy (cont'd)
Planning for the future:
the Ricardian equivalence theorem
Ricardian Equivalence Theorem
The proposition that an increase in the government budget deficit has no effect on
aggregate demand
The reason for the offset
People anticipate that a larger deficit today will mean higher taxes in the future and
adjust their spending accordingly.
Possible Offsets
to Fiscal Policy (cont'd)
Direct Expenditure Offsets
Actions on the part of the private sector in spending
income that offset government fiscal policy actions
Any increase in government spending
in an area that competes with the
private sector will have some direct expenditure offset.
Possible Offsets
to Fiscal Policy (cont'd)
The supply-side effects of changes in taxes
Expansionary fiscal policy could involve reducing marginal tax rates.
Advocates argue this increases productivity since individuals will work harder and longer, save more, and invest more.
The increased productivity will lead to more economic growth.
Possible Offsets
to Fiscal Policy (cont'd)
Supply-Side Economics
The suggestion that creating incentives for individuals and
firms to increase productivity will cause the aggregate
supply curve to shift outward
Laffer CurveKhaldun-Laffer curve is a representation of the relationship
between possible rates of taxation and the resulting levels of
government revenue.Tax rates and
tax revenues
rise together
Tax revenues
are at a maximum
Tax rates and tax
revenues fall
together
Discretionary Fiscal Policy in Practice:
Coping with Time Lags
Recognition Time Lag
The time required to gather information about the current state of the economy
Action Time Lag
The time required between recognizing an economic problem and putting policy into
effect
Effect Time Lag
The time it takes for a fiscal policy to affect
the economy
Discretionary Fiscal Policy in Practice:
Coping with Time Lags (cont'd)
Fiscal policy time lags are long and a policy designed to correct a recession may not produce results until the economy is experiencing inflation.
Fiscal policy time lags are variable in length (1–3 years), and the timing of the desired effect cannot be predicted.
Because fiscal policy time lags tend to be variable, policymakers have a difficult time fine-tuning the economy.
Automatic Stabilizers
Automatic or Built-In Stabilizers
Changes in government spending and taxation that occur
automatically without deliberate action of Congress
The tax system
Unemployment compensation
Welfare spending
Automatic Stabilizers
The automatic changes
tend to drive the economy
back toward its full-
employment output level
What Do We Really Know
About Fiscal Policy?
Fiscal policy during normal times
Congress ends up doing too little too late to help in a
minor recession.
Fiscal policy that generates repeated
tax changes (as has happened)
creates uncertainty.
What Do We Really Know
About Fiscal Policy? (cont'd)
Fiscal policy during abnormal times
Fiscal policy can be effective
The Great Depression—fiscal policy may be able to stimulate
aggregate demand.
Wartime—during World War II real GDP increased dramatically.