Lecture Economics (19/e) - Chapter 30: Fiscal policy, deficits, and debt

This chapter explores the tools of government stabilization policy in terms of the aggregate demand-aggregate (AD-AS) model. Next, the chapter examines fiscal policy measures that automatically adjust government expenditures and tax revenues when the economy moves through the business cycle phases. The recent use and resurgence of fiscal policy as a tool are discussed, as are problems, criticism, and complications of fiscal policy.

Debt 30

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Fiscal Policy

Expansionary Fiscal Policy

Real GDP (billions)

AD 2

AD 1

$5 billion

increase in

spending

Full $20 billion increase in

aggregate demand AS

$490 $510

P 1

Recessions Decrease AD

Contractionary Fiscal Policy

Real GDP (billions)

AD 3

AD 4

$3 billion initial decrease in

spending

Full $12 billion decrease in

aggregate demand AS

$502 $ 522

P 2

AD 5

$ 510

a

P 1

c

government spending

government spending

fluctuations

G

T

Deficit

Surplus

GDP 1 GDP 2 GDP 3 Real domestic output, GDP

2007

economy

2007 and lasted 18 months

Problems, Criticisms, & Complications

short-term fluctuations

terms of long-term effects

investment, and innovation

capital projects

federal deficits and surpluses

Debt held

outside

the Federal

government

and the

Federal

Reserve:

57%

Debt held by the Federal government and the

Federal Reserve: 43%

Public Sector Debt as Percentage of GDP, 2009

Italy Japan Greece Belgium France United States

France Germany United Kingdom

Spain Netherlands

Canada

0 20 40 60 80 100

Source: Organization for Economic Cooperation and Development, OECD

The U.S. Public Debt

Substantive Issues

5 10 15 20 25 30 35 40 0

2 4 6 8 10 12 14 16

Investment (billions of dollars)

ID 1

ID 2 a

Increase in investment demand

Crowding-out effect