Ch15 - 2009-11-4 Fiscal Policy 1 Learning Objective 15.1...

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2009-11-4 1 Fiscal Policy 1 Fiscal policy Changes in federal taxes and purchases that are intended to achieve Learning Objective 15.1 What Fiscal Policy Is and What It Isn’t macroeconomic policy objectives, such as high employment, price stability, and high rates of economic growth. Automatic stabilizers Government spending and taxes that automatically Automatic Stabilizers versus Discretionary Fiscal Policy spending and taxes that automatically increase or decrease along with the business cycle. 2
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2009-11-4 2 Learning Objective 15.1 An Overview of Government Spending and Taxes FIGURE 15.1 The Federal Government’s Share of Total Government Expenditures, 1929–2006 3 Learning Objective 15.1 An Overview of Government Spending and Taxes FIGURE 15.2 Federal Purchases and Federal Expenditures as a Percentage of GDP, 1950–2006 4
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2009-11-4 3 Learning Objective 15.1 An Overview of Government Spending and Taxes FIGURE 15.3 Federal Government Expenditures, 2006 5 Learning Objective 15.1 Is Spending on Social Security and Medicare a Fiscal Time Bomb? Making the Connection Will the federal government be able to keep the promises made by the Social Security and Medicare programs? 6
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2009-11-4 4 Learning Objective 15.1 An Overview of Government Spending and Taxes FIGURE 15.4 Federal Government Revenue, 2006 7 Learning Objective 15.2 Expansionary and Contractionary Fiscal Policy: An Initial Look Changes in government spending: direct effect on AD through G Changes in taxes: indirect effect on AD through disposable income and thus, C
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2009-11-4 5 Learning Objective 15.2 Expansionary and Contractionary Fiscal Policy: An Initial Look FIGURE 15.5 Fiscal Policy 9 Learning Objective 15.2 Using Fiscal Policy to Influence Aggregate Demand: A More Complete Account FIGURE 15.6 An Expansionary Fiscal Policy 10
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2009-11-4 6 Learning Objective 15.2 Using Fiscal Policy to Influence Aggregate Demand: A More Complete Account FIGURE 15 7 FIGURE 15.7 A Contractionary Fiscal Policy 11 Learning Objective 15.2 A Summary of How Fiscal Policy Affects Aggregate Demand Table 15-1 Countercyclical Fiscal Policy PROBLEM TYPE OF POLICY ACTIONS BY CONGRESS AND THE PRESIDENT RESULT Recession Expansionary Increase government spending or cut taxes Real GDP and the price level rise. Rising Inflation Contractionary Decrease government Real GDP and the Rising Inflation Contractionary Decrease government spending or raise taxes Real GDP and the price level fall. 12
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2009-11-4 7 When the economy is in a recession, the government can: a. Reduce expenditures and leave taxes constant in Learning Objective 15.2 order to stimulate aggregate demand. b. Increase government purchases or decrease taxes in order to increase aggregate demand.
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This note was uploaded on 02/22/2010 for the course FBE ECON1002 taught by Professor Rao during the Spring '10 term at HKU.

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Ch15 - 2009-11-4 Fiscal Policy 1 Learning Objective 15.1...

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