Chapter_15_Notes

Chapter_15_Notes - Chapter 15 Notes No change in tax...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
No change in tax (middle LRAS) Right LRAS – LRAS with tax decrease and SRAS with tax cut Chapter 15 Notes Chapter 15 Fiscal Policy Chapter 14 looked at monetary policy and its effects on the economy. Monetary policy is conducted by the central bank, in the case of the US, the Federal Reserve. Now we move on to explore fiscal policy, which is controlled by the federal government. Fiscal Policy - Debate, infrastructure, deficits - LR-SR spend taxes o Timing o Costs After WWII, the federal government has been committed by law “to promote maximum employment, production, and purchasing power”. Congress and the president make changes to taxes and government purchases to achieve policy objectives. Fiscal policy is changes in Federal taxes and purchases to achieve macroeconomic policy objectives, such as high employment, price stability, and high rates of economic growth. What Fiscal Policy Is and What It Isn’t – only actions of federal government - Must be intended for macro goals - Like cutting corporate income taxes, individual income taxes - Not defense spending – not main macro goal Automatic Stabilizers vs. Discretionary Fiscal Policy Automatic stabilizers are types of government spending and taxes that automatically increase or decrease along with the business cycle. 1
Background image of page 1

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

View Full DocumentRight Arrow Icon
Chapter 15 Notes Expansions - Spending on unemployment insurance decrease - Government collects more in taxes as incomes increase - Pay rolls will go up Recessions - Spending on unemployment insurance increases - Government collects less in taxes because incomes decrease Discretionary fiscal policy is when the government takes actions to change spending and taxes. Overview Economists usually look at government spending relative to GDP. Government Purchases – receives a good or service in return for money - Buy an aircraft carrier, pay salary of an FBI agent Government Expenditures – there are four main categories 1. Purchases 2. Interest on national debt – payments to holders of federal government bonds 3. Grants to state and local governments 4. Transfer payments 2
Background image of page 2
Chapter 15 Notes - Largest component - Fastest growing - Social security, unemployment insurance The Effects of Fiscal Policy on Real GDP and the Price Level While the Fed carries out policy by changing the money supply and interest rates, the federal government carries out stabilization policy to offset the effects of the business cycle by changing government purchases and taxes. Both of these lead to changes in AD. 1. Expansionary Fiscal Policy - Increase government purchases - G increase AD increase and/or decreases taxes more disposable income spend more AD increases 3
Background image of page 3

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

View Full DocumentRight Arrow Icon
Chapter 15 Notes both times increasing output and employment 2. Contractionary Fiscal Policy - Decrease government purchases AD decreases and/or increase taxes AD decreases - Achieve price stability 4
Background image of page 4
Chapter 15 Notes PROBLEM TYPE OF POLICY ACTIONS BY CONGRESS AND THE PRESIDENT RESULT Recession Expansionary Increase government
Background image of page 5

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

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 16

Chapter_15_Notes - Chapter 15 Notes No change in tax...

This preview shows document pages 1 - 6. Sign up to view the full document.

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