11_Econ8e_PPT_Ch11

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Fiscal policy : 

Fiscal policy Chapter 11 Economics, 8th Edition Boyes/Melvin

Fiscal Policy : 

Fiscal Policy Fiscal policy (government spending and taxation) is one tool that government uses to guide the economy along an expansionary path. By varying the level of government spending, policymakers can affect the level of real GDP. 2 Copyright © Cengage Learning. All rights reserved.

Eliminating the recessionary gap:Higher Prices Mean Greater spending : 

Eliminating the recessionary gap:Higher Prices Mean Greater spending 3 Copyright © Cengage Learning. All rights reserved.

Multiplier effects : 

Multiplier effects If the price level rises as real GDP increases, the multiplier effects of any given change in AE are smaller than they would be if the price level remained constant. Government spending must be financed by some combination of taxing, borrowing, and creating money. Government spending = taxes + change in government debt + change in government-issued money. 4 Copyright © Cengage Learning. All rights reserved.

Government Spending Financed by Tax Increases : 

Government Spending Financed by Tax Increases Government increases spending, but finances it with tax increases. The increase in spending shifts AD to the right, but the increase in taxes reduces the incentive to work, shifting AS to the left. 5 Copyright © Cengage Learning. All rights reserved.

Government Spending Financed by Borrowing : 

Government Spending Financed by Borrowing Debt is, in a way, a substitute for current taxes. Taxes will have to be higher in the future in order to provide the government with funds to pay off the debt. Ricardian equivalence is the principle that government spending activities financed by taxation or borrowing have the same effect on the economy. Alternatively, the public does not base current spending on future tax liabilities. Research on the issue continues, with supporters on both sides. 6 Copyright © Cengage Learning. All rights reserved.

Crowding Out : 

Crowding Out An increase in government spending financed by borrowing can reduce consumption and investment. As interest rates are driven higher by government borrowing, private investment is “crowded out” by debt-financed government spending. 7 Copyright © Cengage Learning. All rights reserved.

The taxpayer’s federal government credit card statement : 

The taxpayer’s federal government credit card statement 8 Copyright © Cengage Learning. All rights reserved.

U.S. Government Revenues and Expenditures : 

U.S. Government Revenues and Expenditures 9 Copyright © Cengage Learning. All rights reserved.

U.S. Government Expenditures as a Percentage of GDP : 

U.S. Government Expenditures as a Percentage of GDP 10 Copyright © Cengage Learning. All rights reserved.

Fiscal Policy : 

Fiscal Policy Discretionary Fiscal Policy: changes in government spending and/or taxation aimed at achieving a policy goal. Automatic Stabilizer: an element of fiscal policy that changes automatically as income changes. 11 Copyright © Cengage Learning. All rights reserved.

The U.S. Deficit : 

The U.S. Deficit 12 Copyright © Cengage Learning. All rights reserved.

Debt to the Penny : 

Debt to the Penny The U.S. Treasury Reports the National Debt and updates it daily: http://www.treasurydirect.gov/NP/BPDLogin?application=np 13 Copyright © Cengage Learning. All rights reserved.

Implications of Deficits and National Debt : 

Implications of Deficits and National Debt Crowding out means a smaller future capital stock and lower output in the future. Higher interest rates cause currency appreciation, leading to import increases and net export decreases, reducing GDP. This is international crowding out. Higher national debt means higher interest payments paid by the government. 14 Copyright © Cengage Learning. All rights reserved.

Automatic Stabilizers : 

Automatic Stabilizers Progressive Taxes: a tax whose rate rises as income rises. U.S. income taxes currently range from a rate of 10% to 35% depending upon annual income. Transfer Payments: a payment to one person that is funded by taxing others Employees and employers in the U.S. pay a 7.65% Social Security tax to fund a variety of benefits administered through the Social Security program 15 Copyright © Cengage Learning. All rights reserved.

Government Spending on a Global Level : 

Government Spending on a Global Level Government spending has grown over time as a fraction of GNP in industrial countries. Developing countries have not shown uniform growth in government spending. In some developing countries government spending is a smaller percentage of GDP today than it was twenty years ago. 16 Copyright © Cengage Learning. All rights reserved.

Central Government Spending by Functional Category : 

Central Government Spending by Functional Category 17 Copyright © Cengage Learning. All rights reserved.

Taxation : 

Taxation Two types of taxes: direct taxes: on individuals and firms. For example, income taxes and value-added taxes (VAT). indirect taxes: on goods and services Three types of tax rate structures: progressive tax: rate increases with higher income. regressive tax: rate falls with higher income. proportional tax: rate is constant. 18 Copyright © Cengage Learning. All rights reserved.

Central Government Tax Composition by Income Group : 

Central Government Tax Composition by Income Group 19 Copyright © Cengage Learning. All rights reserved.

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