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Chapter13: Fiscal Policy, Deficits, and Debt Chapter Opener p. 257 AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO: 1 Identify and explain the purposes, tools, and limitations of fiscal policy. 2 Explain the role of built-in stabilizers in moderating business cycles. 3 Describe how the cyclically adjusted budget reveals the status of U.S. fiscal policy. 4 Discuss the size, composition, and consequences of the U.S. public debt. ORIGIN OF THE IDEA O 13.1 Fiscal policy In the previous chapter we saw that an excessive increase in aggregate demand can cause demand-pull inflation and that a significant decline in aggregate demand can cause recession and cyclical unemployment. For these reasons, the Federal government sometimes uses budgetary actions to try to stimulate the economy or rein in inflation. Such countercyclical fiscal policy Changes in government spending and tax collections designed to achieve a full-employment and noninflationary domestic output; also called discretionary fiscal policy. consists of deliberate changes in government spending and tax collections designed to achieve full employment, control inflation, and encourage economic growth. (The adjective fiscal simply means financial.) We begin this chapter by examining the logic behind fiscal policy, its current status, and its limitations. Then we examine a closely related topic: the U.S. public debt. Our discussion of fiscal policy and public debt is very timely. In 2009, Congress and the Obama administration began a $787 billion stimulus program designed to help lift the U.S. economy out of deep recession. This fiscal policy contributed to a $1.4 trillion Federal budget deficit in 2009, which increased the size of the U.S. public debt to $11.9 trillion. Fiscal Policy and the AD-AS Model p. 258 The fiscal policy just defined is discretionary (or active). It is often initiated on the advice of the president's Council of Economic Advisers (CEA) A group of three persons that advises and assists the president of the United States on economic matters (including the preparation of the annual Economic Report of the President). , a group of three economists appointed by the president to provide expertise and assistance on economic matters. Discretionary changes in government spending and taxes are at the option of the Federal government. They do not occur automatically. Changes that occur without congressional action are nondiscretionary (or passive or automatic), and we will examine them later in this chapter. Expansionary Fiscal Policy When recession occurs, an expansionary fiscal policy An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output. may be in order. This policy consists of government spending increases, tax reductions, or both, designed to increase aggregate demand and therefore raise real GDP. Consider aggregate demand and therefore raise real GDP.... View Full Document

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