BA_315_LN_12_FISCAL_POLICY

BA_315_LN_12_FISCAL_POLICY - FISCAL POLICY Lecture Notes#12...

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FISCAL POLICY Lecture Notes #12 BA 315: Economy, Industry, and Competitive Analysis Source: Schiller Chapter 12 Edited by Ali Emami Department of Finance Charles H. Lundquist College of Business University of Oregon
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This lecture focuses on the role of Aggregate Demand in the market economy and explains the Keynesian view of demand and how changes in demand can reduce unemployment. The lecture shows how government intervention through the uses of fiscal policy can correct the problems of inadequate demand and improve macroeconomic outcomes. The lectures attempts to answer the following questions: 1. Why did Keynes think the market was inherently unstable? 2. How can fiscal policy help stabilize the economy? 3. How will the use of fiscal policy affect the government's budget deficit? Concepts you will learn Fiscal Policy Marginal Propensity to Consume (MPC) Aggregate Demand Marginal Propensity to Save (MPS) Consumption Multiplier Investments Disposable Income Net Exports Fiscal Restraint Equilibrium (Macro) Aggregate Supply G D P g a p B u d g e t D e f i c i t Fiscal Stimulus Budget Surplus Saving
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Lecture Outline I. Fiscal Policy f Definition: Fiscal Policy - The use of government taxes and spending to alter macroeconomic outcomes. II. Components of Aggregate Demand A. Aggregate Demand f Definition: Aggregate Demand - The total quantity of output demanded at alternative price levels in a given time period, ceteris paribus. B. Four major components of aggregate demand. (Figure 12.1) 1. Consumption 2. Investment 3. Government spending 4. Net exports (exports minus imports) C. Consumption (Figure 12.1) f Definition: Consumption - Expenditure by consumers on final goods and services. Note: Consumption expenditures such as tax services, concert tickets, tuition, sporting event tickets, cars, etc., account for about two-thirds of total spending in U.S. economy. D. Headline: “Consumer Confidence Plunges to Two-Year Low” (Expectations) Consumer confidence plunged to its lowest level in two years as the holiday season failed to lift the spirit of Americans rattled by stock-market volatility and mounting fears of a significant economic slowdown. Expectations for jobs and income affect current spending decisions. When expectations diminish, the rate of spending typically slows down. E. Investment (Figure 12.1) f Definition: Investment - Expenditures on (production of) new plant and equipment (capital) in a given time period, plus changes in business inventories. Note: Investment expenditures, such as farmers replacing old tractors, factories installing robotics or new computers, etc., accounts for 15% of U.S. spending.
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F. Government Spending (Figure 12.1) 1. Includes federal, state and local spending on highways, schools, police, national defense and all other goods and services provided by public sector. 2.
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BA_315_LN_12_FISCAL_POLICY - FISCAL POLICY Lecture Notes#12...

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