37 - 3/13/2011 1 Fiscal Policy and Macroeconomics Alan J....

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Unformatted text preview: 3/13/2011 1 Fiscal Policy and Macroeconomics Alan J. Auerbach Overview: A Taxonomy of Policy • Government intervention in the economy takes many forms • Monetary Policy : the actions of central banks to control the money supply and interest rates, which indirectly controls the supply of credit to households and business borrowers – Tighter monetary policy means reducing the money supply and raising interest rates, to reduce output and inflation; looser monetary policy the opposite 3/13/2011 2 Overview: A Taxonomy of Policy • Government intervention in the economy takes many forms • Fiscal Policy : governments raise revenue through taxes and use the revenue to purchase goods and services (e.g., roads, armies, etc.) and to make transfer payments (social security, health care, unemployment compensation, etc.) – Tighter fiscal policy means more taxes or less spending – a higher budget surplus/smaller deficit Overview: A Taxonomy of Policy • Government intervention in the economy takes many forms • Fiscal Policy : governments raise revenue through taxes and use the revenue to purchase goods and services (e.g., roads, armies, etc.) and to make transfer payments (social security, health care, unemployment compensation, etc.) – Fiscal policy’s effects also depend on the types of spending and taxes used 3/13/2011 3 Overview: A Taxonomy of Policy • Government intervention in the economy takes many forms • Regulation : governments regulate economic activity in many ways; examples include antitrust regulations and restrictions on pollution emissions Overview: A Taxonomy of Policy • Although we specify these three categories of interactions as distinct, there is really considerable overlap • Examples: – Pollution taxes versus tradable permits 3/13/2011 4 Overview: A Taxonomy of Policy • Although we specify these three categories of interactions as distinct, there is really considerable overlap • Examples: – Pollution taxes versus tradable permits – Capital requirements for bank Capital requirements for banks Overview: A Taxonomy of Policy • Although we specify these three categories of interactions as distinct, there is really considerable overlap • Examples: – Pollution taxes versus tradable permits – Capital requirements for bank Capital requirements for banks – Central bank bailouts of failing financial institutions 3/13/2011 5 Overview: A Taxonomy of Policy • Although we specify these three categories of interactions as distinct, there is really considerable overlap • Even though we will be focusing on “fiscal” policy, the effects will be similar for “monetary” policy or “regulatory” policy if the underlying policy interventions are similar – Changing what we call the policy shouldn’t change the policy’s effects , but it might change the politics Policy and Politics • Example: tradable permits versus pollution taxes – In both cases, government collects money from polluters based on the level of emissions...
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This note was uploaded on 03/18/2011 for the course ECON 196 taught by Professor Pierre during the Spring '10 term at Berkeley.

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37 - 3/13/2011 1 Fiscal Policy and Macroeconomics Alan J....

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