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Unformatted text preview: Chapter 08 - Fiscal Policy, Deficits, and Debt Chapter Eight Fiscal Policy, Deficits, and Debt CHAPTER OVERVIEW This chapter looks at government efforts to pursue stabilization of the economy through spending and taxation, analyzing the effects of fiscal policy through the aggregate demand-aggregate (AD-AS) model. Built-in stabilizers that automatically adjust government expenditures and tax revenues when the economy moves through the business cycle phases are examined. The recent use and resurgence of fiscal policy as a tool are discussed, as are problems, criticism, and complications of fiscal policy. Budgeting issues are given considerable attention. The concept of the standardized budget is developed and is used to assess the direction of fiscal policy. Issues of national concernFederal budget deficits and the public debtare the focus of the latter part of this chapter. Recent data on the U.S. budget and debt are provided as a basis for discussion. The material on the public debt is designed to dispel two popular misconceptions as to the character and problems associated with a large public debt: (1) the debt will force the U.S. into bankruptcy; and (2) the debt imposes a burden on future generations. The debt discussion, however, also entails a look at substantive economic concerns. Potential problems of a large public debt include greater income inequality, reduced economic incentives, and crowding out of private investment. The chapter concludes by examining the impending problems of the Social Security system and policy options proposed to correct them. INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Define and explain the purpose of fiscal policy. 2. Describe the Council of Economic Advisers. 3. Distinguish between discretionary and nondiscretionary fiscal policy. 4. Differentiate between expansionary and contractionary fiscal policy. 5. Recognize the conditions for recommending an expansionary or contractionary fiscal policy. 6. Explain expansionary fiscal policy and its effects on the economy and Federal budget. 7. Explain contractionary fiscal policy and its effects on the economy and Federal budget. 8. Give two examples of how built-in stabilizers help eliminate recession or inflation. 9. Explain the differential impacts of progressive, proportional, and regressive taxes in terms of stabilization policy. 10. Explain the significance of the standardized (or full-employment) budget concept. 11. Describe recent U.S. fiscal policy actions and the motivation behind them. 12. List three timing problems encountered with fiscal policy. 13. State political problems that limit effective fiscal policy. 14. Identify actions by households, and by state and local governments that can frustrate fiscal policy....
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