econ 8 - Dr. Mohammed Alwosabi Econ141 Ch. 8 Notes on...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Dr. Mohammed Alwosabi Econ141 – Ch. 8 1 Notes on Chapter 8 FISCAL POLICY ± Government Budget is the annual statement of government expenditures and revenues (from tax and any other resources), together with the laws and regulations that approve and support these expenditures and revenues. ± The budget has two purposes: 1. To finance the activities of the government 2. To stabilize the economy (the fiscal policy) ± Government budget balance is the tax revenues and any other revenues minus expenditures o If tax revenue > expenditures, government has budget surplus Ö government debt decreases. and government can lend others o If tax revenue < expenditures, government has budget deficit Ö government debt increases and government needs to borrow. o If tax revenue = expenditures, government has budget balance ± Fiscal policy is the use of government budget to achieve macroeconomic objectives such as full employment, sustained economic growth, and price level stability. ± Fiscal policy action that seek to stabilize the business cycle work by changing aggregate demand. ± These policy actions can be either automatic or discretionary: o Automatic FP is a change in FP that is triggered by the state of the economy. For example, an increase of workers’
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Dr. Mohammed Alwosabi Econ141 – Ch. 8 2 income triggers an automatic increase in tax revenues. That is this type of FP adjusts automatically. o Discretionary FP is a policy action that is initiated by government. For example if government passes a law that increases or decreases taxes. ± Fiscal policy can be expansionary or contractionary. ± Expansionary fiscal policy occurs when the economy has less than full employment RGDP and government wants to increase RGDP and employment. ± In expansionary fiscal policy, the government increases its spending (G) or cuts taxes (T) or both. o When the government increases G, it adds directly to AD, since G is part of AD o When the government cuts T, it increases people's disposable income (total income minus taxes), and people will spend much of that extra income, so consumption (C) increases. o In both cases, AE (and AD) will also increase indirectly through the multiplier effect, as the initial increase in G or C touches off a whole chain of consumption. AE shifts upward and AD shifts rightward. This will cause equilibrium RGDP (Y) to increase and the equilibrium price level (P) to increase. ± Contractionary fiscal policy
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/06/2010 for the course BUSSINESS econ taught by Professor Mohammed during the Spring '10 term at École Normale Supérieure.

Page1 / 8

econ 8 - Dr. Mohammed Alwosabi Econ141 Ch. 8 Notes on...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online