18 Fiscal Policy_ Part 1 - Agenda Fiscal Policy and Budget...

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1 18-1 Government Spending and its Financing, Part 1 18-2 Agenda • Fiscal Policy and Budget Balances • Measuring Budget Change ¾ Automatic versus Discretionary Changes • Designing Effective Short-run Fiscal Policy 18-3 Fiscal Policy and Budget Balances • Budget Arithmetic: ¾ G = G ¾ T = tY ¾ T–G=tY–G , where • G is the autonomous budget, and • tY is the induced budget. 18-4
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2 18-5 Fiscal Policy and Budget Balances • Y is determined in the IS – LM model. • T – G is determined by the BB line. 18-6 Actual budget balance Y T – G Surplus (+) -G Deficit (-) T - G 18-7 Fiscal Policy and Budget Balances • Automatic Stabilizers: ¾ Automatic stabilizers cause fiscal policy to be counter-cyclical by changing government spending and/or tax revenues automatically. • For example, during recessions, unemployment insurance payments rises because the number of unemployed people increases. • For example, during recessions, tax revenues fall because (taxable) income declines. 18-8 Fiscal Policy and Budget Balances • Automatic Stabilizers: ¾ Because of automatic stabilizers, the government budget balance will fall during recessions and rise during booms.
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18 Fiscal Policy_ Part 1 - Agenda Fiscal Policy and Budget...

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