Fiscal Policy

Should we relax and let recessions go away?

Some might say yes but most say no bc in the long run we’re all dead we care about now and now is always the short run. We can’t afford to wait bc people lose their jobs or can’t pay bills so we want to close those gaps now.

Stabilization Policy

Use of gov policy to reduce the severity of recessions and rein in excessively strong expansions

Full Income Accounting ID

Y += C + I + G + NX

With new ID what does AEplan look like?

AE = a + MPC (Y-T) + I plan + G + NX

How can government affect AE?

Can affect via government spending including paying people or taxes

What are sources of tax revenue? (In order of most impact)

* Personal income taxes  
* Social Insurance Taxes (Medicare, social security taxes, w2 w/holdings,  
* corporate taxes (optional tax in the US bc easy for big biz to get around)
* other taxes (sales and property taxes that exist on local levels)  

What are taxes used for (in order of most spent)

* national defense  
* Ed  
* Social Security
* Medicare and Medicaid  
* Other (food stamps) 
* Other goods and services (roads, bridges, interstate) 

Discretionary v. Mandatory Spending

Discretionary spending is what the gov choses to spend on mandatory is spending the government has to do like social security, medicare and medicaid. After Johnson’s great society act health and medicare shot up a ton as part of spending and mandatory spending generally has overcome discretionary spending since the 80s.

Counter Cyclical Policy

is welfare enhancing it brings resources to use protects people from negative consequences of unemployment and improves consumption smoothing due to smoother income

US COVID-19 Stimulus

The greatest fiscal policy response ever made

Balanced Budget Multiplier equation

spending multiplier + tax multiplier = balanced budget multiplier

Debt-GDP Ratio

ratio btw total size of our debt divided by the amt of stuff we make in a year aka income. Stable, rise or fall depending upon numbers.

Automatic Stabilizers

they ramp up spending in the bad times and cut during good times things like unemployment insurance

Unemployment Insurance is an automatic stabilizer because…

Like unemployment insurance, they already exist and don't expire. They increase spending during recession since as recession more unemployment more people claiming money and now they get to spend it. Then when people have jobs we spend less money on this.  

Progressive taxation and income redistribution is an automatic stabilizer because…

(charge rich people higher % income than poor and then we give that money to those that are poorer and in need): rich people usually don't lose jobs in recession so more of that redistribution will go to the poor who are losing jobs 

What classify discretionary policy over automatic stabilizers?

has to be authorized

Deficit

how much less money are we bringing in then we are spending (T-G)

Debt

sum of money a government owes at a particular point in time (includes money in this period and prior owed) 

Relationship btw debt and deficit?

They are linked every time we run deficit we add to the debt but they are different

Who own debt (largest to smallest holders)

* Largest debt holders are private investors in US  
* Next is foreign investors  
* Next is federal debt held by agencies and trusts like social security investment since it's a safe investment  
* Lastly fed debt held by fed reserve bank other branches of US gov have lent money to other areas of US gov  

Are we worried about our debt in the US?

No bc we have eternity to pay it off and we are practically getting money for free since the interest rate is so low. Most countries don’t worry about paying it off to bc also in the long run we’re all dead.

Problems posed by rising government debt

Worry that it will hurt growth by crowding out private investment spending, concerns over default if US default doesn’t become the unstoppable always paying on time queen she is and might make investors lose faith, printing more money breeds inflations