Lecture Macroeconomics (19/e) - Chapter 13: Fiscal policy, deficits, and debt

After reading this chapter, you should be able to: Identify and explain the purposes, tools, and limitations of fiscal policy; explain the role of built-in stabilizers in moderating business cycles; describe how the cyclically-adjusted budget reveals the status of U.S. fiscal policy; discuss the size, composition, and consequences of the U.S. public debt.

Debt 13

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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