In chapter 10 you will learn: What fiscal policy is and what it is used for; what discretionary fiscal policy is and its function; about the economy’s built-in stabilizers; what a cyclically adjusted budget is; the problems, criticisms, and complications of fiscal policy.
Trang 1CHAPTER 10
SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE
FISCAL POLICY
Trang 2In this chapter you will learn
What fiscal policy is and what it is used
for
What discretionary fiscal policy is and its
function
About the economy’s built-in stabilizers
What a cyclically adjusted budget is
The problems, criticisms, and
complications of fiscal policy
Trang 3Chapter 10 Topics
Legislative Mandates
Fiscal Policy & the AD-AS Model
Built-In Stabilization
Evaluating Fiscal Policy
Problems, Criticisms &
Complications
Trang 4Legislative Mandates
Great Depression need for
stabilization role
Unemployment Insurance introduced
during World War II
Governments regularly use fiscal
policy to stabilize the economy
Trang 5Chapter 10 Topics
Legislative Mandates
Fiscal Policy & the AD-AS Model
Built-In Stabilization
Evaluating Fiscal Policy
Problems, Criticisms &
Complications
Trang 7Expansionary Fiscal Policy
Recessionary Gap
Options:
Increase Government Spending
Decrease Taxes
Some Combination of the Two
Discretionary Fiscal Policy
Trang 10Contractionary Fiscal Policy
Inflationary Gap
Options:
Decrease Government Spending
Increase Taxes
Some Combination of the Two
Discretionary Fiscal Policy
Trang 11Contractionary Fiscal Policy
Trang 13Policy Options: G or T?
depends on political views about
size of government
Trang 14Chapter 10 Topics
Legislative Mandates
Fiscal Policy & the AD-AS Model
Built-In Stabilization
Evaluating Fiscal Policy
Problems, Criticisms &
Complications
Trang 15A tax or government expenditure
Government establishes tax rates,
but does not set total taxes
Government establishes tax rates,
but does not set total taxes
Automatic or Built-In Stabilizers
Trang 16G,T T = Net Taxes
G (assumed constant)
Trang 18the stabilizers will automatically
generate an expansionary budget
deficit when GDP is low
and a contractionary surplus when
GDP is high
Automatic or Built-In Stabilizers
Trang 19The built-in stability depends on:
Tax Progressivity
– Progressive
– Proportional
– Regressive
The more progressive the tax system, the
greater the automatic stabilization
Automatic or Built-In Stabilizers
Trang 20Chapter 10 Topics
Legislative Mandates
Fiscal Policy & the AD-AS Model
Built-In Stabilization
Evaluating Fiscal Policy
Problems, Criticisms &
Complications
Trang 21Cyclically Adjusted Budget
automatic stabilizers can mask the
direction of discretionary fiscal
policy
the cyclically adjusted budget
shows what the budget balance
would be if the economy were
operating at full employment
Trang 22employment
full-GDP
the cyclically
adjusted deficit is zero
in year 1 at
GDP 1
the cyclically
adjusted deficit is zero
the deficit is a by-product of the recession
Trang 23GDP 4
(year 4)
the cyclically adjusted deficit is zero in year 3
the cyclically adjusted deficit is zero in year 3
taxes are reduced
employment
employment
full-GDP
Figure 10-4
Cyclically Adjusted Budget
$50 billion deficit due to recession
$50 billion deficit due to recession
$25 billion deficit due to expansionary fiscal policy
$25 billion deficit due to expansionary fiscal policy
economy enters a recession in year 4 economy enters a recession in year 4
Trang 24Recent Canadian Fiscal Policy
neutral to mildly expansionary in the
early 1990s
contractionary in later years
actual deficits have given way to
actual surpluses
Trang 25Chapter 10 Topics
Legislative Mandates
Fiscal Policy & the AD-AS Model
Built-In Stabilization
Evaluating Fiscal Policy
Problems, Criticisms &
Complications
Trang 26Problems, Criticisms, &
A Political Business Cycle?
Offsetting Provincial & Municipal
Finance
Trang 27Crowding-Out Effect
expansionary fiscal policy
higher interest rates reduction in interest-sensitive spending
may not be significant in a recession
fiscal policy can be accommodated
by increases in money supply
Problems, Criticisms, and
Complications
Trang 28some portion of the potential effect
of expansionary fiscal policy may be
dissipated in the form of inflation
illustrated…
Problems, Criticisms, and
Complications
Trang 31Fiscal Policy in the Open
Economy
Shocks Originating from Abroad
Net Export Effect…
Trang 32recession expansionary fiscal policy higher domestic interest rates increased foreign demand for C$
C$ appreciates net exports fall partial offset to expansionary fiscal policy
Table 10-1
Trang 33inflation contractionary fiscal policy lower domestic interest rates decreased foreign demand for C$
C$ depreciates net exports rise partial offset to contractionary fiscal policy
Table 10-1
Trang 34Supply-Side Fiscal Policy
tax changes may alter aggregate
supply & affect the results of fiscal
Trang 35Supply-Side Fiscal Policy
Trang 36Supply-Side Fiscal Policy
most economists are skeptical about
the supply-side effects of tax cuts
– weak effects
– timing
Trang 37Chapter 10 Topics
Legislative Mandates
Fiscal Policy & the AD-AS Model
Built-In Stabilization
Evaluating Fiscal Policy
Problems, Criticisms &
Complications