Chapter11Summary - 1 Chapter 11 Summary Tucker...

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Chapter 11 Summary Tucker , Macroeconomics for Today , 5 th Edn. 1. Fiscal policies relate to the spending, taxing and borrowing activities of the federal government. The goal of fiscal policy is a non-inflationary, full employment output level. 2. Fiscal policies may be either discretionary or nondiscretionary . Discretionary fiscal policies may emphasize shifting either the AD schedule or the AS schedule. Keynesians believe that the primary impact of discretionary fiscal policy is on the aggregate demand schedule. Supply-side economists believe that the primary impact of discretionary fiscal policy (especially tax rate reductions) is on the aggregate supply schedule 3. Keynesian discretionary fiscal policy relies on changes in G (tax collections constant), changes in tax collections (government expenditures constant), or combinations of both changes in taxes and changes in government expenditures to move the economy to a non-inflationary full employment output level. The multiplier for changes in G (tax collections constant) is equal to the reciprocal of the MPS (that is, 1/MPS, see text, p. 266). The multiplier for changes in taxes, G constant, is equal to -MPC/MPS or, equivalently, (1- the government expenditures multiplier, as noted in the text, p. 268). The balanced budget multiplier is equal to 1, as explained in the text, p. 270. 4. In the AD-AS model, Keynesian fiscal policies are designed to shift the AD schedule. The impact of these policies depends in part on the shape of the AS schedule. The steeper is the AS schedule, the less effective will shifts of the AD schedule be in terms of impacting the level of real GDP. That is, the steeper is the AS schedule, the more will increases in aggregate demand be dissipated by increases in prices rather than increases in real output (that increases employment and reduces the unemployment rate).
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