MACRO Chapter #11 Fiscal Policy

fiscal policy

changes in government spending or taxes to influence some macroeconomic variable

two elements of fiscal policy

automatic stabilizers

discretionary fiscal policy

automatic stabilizers

government programs or policies that moderate fluctuations in income

passive

reduces multipliers

examples of automatic stabilizers

progressive income taxes

unemployment insurance

welfare programs

agricultural price supports

stability of government spending

discretionary fiscal policy

government recognizes a problem and decides to act on it

requires a change in legislation or regulations

active, but has fiscal lag (it takes time to take effect on the economy)

examples of discretionary fiscal policy

civilian conservation corps (1930s)

types of tax systems

progressive tax system, regressive tax system and proportional tax system

progressive tax system

average tax rate increases as your income increases (federal or state income tax)

proportional tax system

average tax rate stays constant as income increases (poll tax)

regressive tax system

average tax rate decreases as income increases (property tax)

fiscal policy in the classical model

know the market for loanable funds graph, complete crowding affects leads to no effect on graph as fiscal policy changes

an increase in government spending is directly offset by decrease in consumption and investment spending

fiscal policy in the fixed-price keynesian model

can affect the model, increase in government spending (spending multiplier) and taxes (tax multiplier)

can cause GDP gap

recessionary gap

full employment (Yf) is above equilibrium Y, potential GDP is greater than actual GDP

inflationary gap

full employment (Yf) is below equilibrium Y,

potential GDP is less than actual GDP

three ways to bring the economy to full employment (fixed-price keynesian model)

increase government taxes

cut taxes

balanced budget change

increase government spending equation

change in output = spending multiplier (1/1-MPC+MPIM) X change in GDP

change in output/Y is where youll put the GDP gap

cut taxes

change in output = tax multiplier (-MPC+ MPIM / 1-MPC+MPIM) X change in taxes

change in output/Y is where youll put the GDP gap

balanced budget change

change in government spending = change in taxes = change in output= GDP GAP

if government spending increases by that gap, multiply by SM by the GAP

if taxes were to increase by that gap, multiply TM by the GAP

subtract the two and thats the Net change in output

three ways to finance an increase in government spending

increase taxes, borrow money by issuing bonds (most used), print money (least used bc leads to hyperinflation)

supply-side economics

also known as reaganonomics/ trumponomics

income tax cuts leads to an increase in after tax wages, which increases the labor supply which will lead to an increase in aggregate supply

will lead to increase in output without an increase in prices, but this isnt always true

laffer curve

upside down U,

tax revenue on the vertical axis, tax rate on the horizontal axis

taxes and neo-keynesian AS model

on the horizontal part, no inflation when taxes decrease but as we get to the vertical part, there is A LOT of inflation

taxes and neo-classical AS model

decrease in taxes, leads to increase in AD, which leads to SRAS also adjusting

budget deficit

the difference between government spending and tax revenue for a given year

government is spending more than it is earning in tax revenue

national debt

the sum of all funds that the government owes to all of its creditors that has not been paid off

twin deficits

both a fiscal deficit and a current account deficit