Topic12-Fiscal Policy_AAPBW6_Rev

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Unformatted text preview: umstances Defense, regulation, internal security (police, fire fighters, homeland security), legal system, funding of basic R&D, and many others Transfers At best a transient short-term fix shortThis kind of increase in GDP does not mean GDP that people are necessarily better off! Goes back to the short-term neutrality shortdiscussion Temporary reductions in output and employment may be optimal Fiscal policy is a blunt and broad weapon! Also outcome of the political process Some have the character of a public good 16 19 “Multipliers” Budget Debt and Deficits • Question: • A term that has come back into use with the current situation • If you spend $1 government, by how much does GDP go up? It depends on the economics situation and where and how firmly you fit in the conviction spectrum Are deficits a good thing? Should we worry? • Deficit financing is one of the three BIG issues in fiscal policy • The Others? Social Security, Medicare/Aid Social Is SS going bankrupt? Do we have to change the system? Can we sustain Medicare/Aid? 20 23 “Multipliers” Budget Deficits • At “full employment” mult = 0 or mult < 0! • If you spend the $1 in transfers the multiplier ought to be less than if you spend it directly • Barro in a recent article claims that over WWII, the government spending multiplier was 0.82 • A lot of the discussion before passing Obama’s relief package was about multipliers Different assumptions give different answers • Government outlays (spending): Government purchases (G) Transfer payments (TR), and Net interest payments (INT) • The budget deficit is then defined as: deficit = outlays - tax revenues Deficit = (G + TR + INT) - T TR INT • Primary deficit excludes net interest from government outlays = (G + TR) - T TR 21 24 Example #1 Budget Debt and Deficits • Governments all over the world borrow to finance a shortfall of revenue compared to expenses; some of reasons: Don’t have to raise taxes now Don’ Taxpayers can postpone payment Finance capital projects Finance large transient expenditures Unable to collect taxes • Let Gov. purchases SS payments Welfare payments Interest on Debt Income taxes Corp taxes SS & Medicare levies = 300 = 200 = 100 = 30 = 220 = 40 = 140 • What are government spending and receipts? • They borrow in their own currency and they borrow in foreign currency 22 Gov Spending = Gov Receipts = 25 Debt Example #1 • The accumulated budget deficit is the accumulated national debt. Deficit is a flow, debt is a stock • Let Gov. purchases SS payments Welfare payments Interest on Debt Income taxes Corp taxes SS & Medicare levies = 300 = 200 = 100 = 30 = 220 = 40 = 140 Not all government borrowing shows up in the “unified” budget unified” Differences between state & Fed budget processes • A useful measure is the Debt-GDP ratio Debt From the 1980s until recently, federal government spending far outstripped revenue, causing the debt to double from its 1980 level...
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