FISKAL POLICY.pptx
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Transcript of FISKAL POLICY.pptx
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FISKAL POLICY
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Fiskal policy is
Fiskal policy is the setting of the federal budget
and thus comparises decisions on goverment
spending and taxation.
In the consideration of the classical view of fiscalpolicy, it is conveniet to begin with government
spending
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Government spending
Like a business or household, the government
has a budget constraint, a condition that states
that all expenditures must be financed from
some source, the goverment has three sources :
taxation, selling bonds to public, or creating
money
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To increase spending, then the goverment must incrase
taxation, sell additional bonds to the public, or increase themoney supply, for now, to avoid bringing in a monetary
policy change, we assume the money supply to be fix, we
also assume that tax colections are fixed, the incrasedgovernment expenditures are therefore assumed to
financed by selling bonds to the public
The effect in the leonable funds market of an incrase in
goverment spending financed by a sale of bonds to the
public is show in figure 4.5
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Interestrate
r sg
r1
r0 B A
i + g
i
s,i, g ti1 i0 = s0 s1
Loanable funds
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TAX POLICY
1. Demand side effects
As long as we consider only the possible effects on aggregate
demand, analysis of a change in taxes produces results
that are analogous to those for government spending. For
example by increase the disposable income of household,
a tax cut might stimulate consumption demand. If
however the government sold bonds to the public to
replace the revenues lost by the tax cut
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If revenue lost because of tax cut are replace by
printing new money, then, as with an increase in
government spending. The money creation will
increase aggregate demand
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2. Supply side effects
If the tax were simply a lump sum cut, meaning,
for example, that every household received a tax
cut of $100, then the demand side effects
would be all that we would need to consider. But
suppose the tax cut was in the form of a
reduction in income tax rates. Suppose the
marginal income tax rate were cut from an initial
rate of 40 percent to a new rate of 20 percent.
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Instead of having 40 cents of every additional
dolar taken as a tax payment, only 20 cents
would now be taken. In the classical model such
a change would have an incentive effect on laborsupply. The change would effect the supply side
of the model and would effect output and
employment
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Labor market equilibrium
wp N (ty = 0,40 )
N (ty = 0,20 )
WP
W
P
Nd
N
N0 N1
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Output determined along the production function
y
F ( K , N )
Y1
Y0
N0 N1
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Aggregat supply and demand
p
ys (ty = 0,20 )
ys (ty = 0,20 )
p0
p1
yd
y
y0 y1