141_Chapter_9_Lecture - 9 [22 ] The Government and Fiscal...

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9 [22] The Government and Fiscal Policy OUTLINE OF TEXT MATERIAL I. Introduction A. There is much controversy over the appropriate role government should play in the economy. This controversy constantly shifts between positive and normative arguments. 1. Keynesians believe that the macroeconomy is likely to fluctuate too much if left on its own 2. Others (known by various names but whose antecedents are the classical school) claim that fiscal and monetary policies are incapable of stabilizing the economy and, even worse, may be destabilizing and harmful. 3. Most agree, however, that governments are important actors in the economies of virtually all countries, like it or not. B. The government can affect the macroeconomy through fiscal policy (its spending and taxing behavior) and monetary policy (the behavior of the central bank regarding the nation’s money supply). In the U.S. the central bank is the Federal Reserve. 1. Fiscal policy includes changes in government purchases of goods and services (mainly labor services), taxes, and/or transfer payments to households with the objective of changing the economy’s growth. 2. Monetary policy means changes in the quantity of money in circulation with the objective of changing the economy’s growth. Often monetary policy is set as an interest rate target. 3. In the United States the central bank is not part of the government. Technically the U.S. government only has control of fiscal policy. 82
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83 Principles of Macroeconomics II. Government in the Economy A. We need to distinguish between variables that the government controls directly and those that are a consequence of government decisions. Neither can be evaluated without taking the state of the economy into account. 1. For example, the government controls tax rates, but tax revenues are also affected by the state of the economy. 2. Similarly, government spending also depends both on government decisions and on the state of the economy. When the economy moves into a recession and unemployment rises, government spends more on unemployment compensation. 3.
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141_Chapter_9_Lecture - 9 [22 ] The Government and Fiscal...

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