Lecture_Notes_16A - Fiscal and Monetary Policy Effects...

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Fiscal and Monetary Policy Effects CHAPTER 16A
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When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Explain the effects of fiscal policy. 1
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16.1 THE BUDGET AND FISCAL POLICY Fiscal policy is the use of the federal budget to sustain economic growth and smooth the business cycle. The main instruments of Fiscal policy are Government Expenditures (government spending and other transfer payments) and Taxes. The relative magnitudes of both of these policy instruments determines whether the government has a budget surplus or budget deficit .
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16.1 THE BUDGET AND FISCAL POLICY The government has a budget surplus if tax receipts exceed expenditures. The government has a budget deficit if expenditures exceeds tax receipts. The government has a balanced budget if tax receipts equal expenditures. Budget surplus (+)/deficit (–) = Tax receipts – Expenditures The government’s surplus or deficit is equal to tax receipts minus expenditures.
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16.1 THE BUDGET AND FISCAL POLICY National Debt: National The government borrows to finance a budget deficit and repays its debt when it has a budget surplus. The amount of debt outstanding that arises from past budget deficits is called national debt .
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TYPES OF FISCAL POLICY There are two types of fiscal policies: Automatic Policy Action and Discretionary Policy Action Discretionary fiscal policy : This is a fiscal policy action that is initiated by an act of Congress. It requires a change in a spending program or the tax laws. For example, an increase in defense spending or a cut in the income tax rate by an act of Congress is a discretionary fiscal policy. Discretionary fiscal policy influences both aggregate demand and aggregate supply.
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DISCRETIONARY FISCAL POLICY: DEMAND-SIDE EFFECTS Changes in government expenditure and changes in taxes have multiplier effects on aggregate demand. The Government Expenditure Multiplier The government expenditure multiplier is the magnification effect of a change in government expenditure on goods and services on aggregate demand. Government expenditure is a component of aggregate expenditure, so when government expenditure increases, aggregate demand increases.
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THE BUDGET AND FISCAL POLICY Real GDP increases and induces a change in consumption expenditure (an increase in the number of people hired to increase the production of goods and services; the newly hired earn incomes which enable them to increase their consumption for goods and services) which brings a further increase in aggregate expenditure (note that the increase in aggregate expenditure comes from two sources as a result of the multiplier effect.
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THE BUDGET AND FISCAL POLICY Example - A Homeland Security Multiplier: The terrorist attacks of September 11, 2001, brought a reappraisal of the nation’s homeland security requirements and an increase in government expenditure. This increase in purchases initially increased the incomes of
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This note was uploaded on 06/21/2011 for the course ECON 201 taught by Professor Staff during the Spring '08 term at Northern Virginia Community College.

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Lecture_Notes_16A - Fiscal and Monetary Policy Effects...

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