MIT14_02F09_lec18_19

MIT14_02F09_lec18_19 - Government and Fiscal Policy Fi...

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Government and Fiscal Policy
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Outline Government and Fiscal Policy Government deficit and debt Should we worry about deficit? Ricardian Equivalence Social Security •T a x es and Incentives 2 es d ce ves
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Government Outlays Major Government outlays: t P h ( G ) t dit tl d d 1. Government Purchases (G) = government expenditures on currently produced goods and services and capital goods. (Government Investment are around 1/6 of G in the US) 2. Transfer Payments (TR) = Payments made to individuals for which the government does not receive current goods or services in exchange (Social Security, military and civil service pensions, unemployment insurance, Medicare,…) Minor Government outlay: 3. Net Interest Payment = Interest Paid to the holders of government bonds less the interest received by the government 3
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Government Outlays 4 60 50 40 30 20 10 0 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Year World war II (1941-1945) Government outlays (percent of GDP) Total Government Outlays Government Purchases Korean war (1951-1953) Transfer Payments Net Interest Payments Figure by MIT OpenCourseWare.
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Government Revenues The Government revenues come from TAXES: l t li d t t 1. Personal taxes on personal income and property taxes Tax increases: Biggest jump during World War II, Clinton in deficit-reconstruction effort Tax cuts: Kennedy Johnson 1964, Reagan 1981, Bush early 2000s 2. Contributions for Social Insurance Social insurance contributions usually are levied as fixed percentage of a worker’s salary up to a ceiling (increases both in the contribution rate and in the ceiling) 3. Taxes on production and imports Sales taxes declined in WWII and then stable 4. Corporate taxes (on profits) High during WWII and Korean war 5
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Government Revenues 6 35 30 25 20 15 10 5 0 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Year Personal taxes Taxes on production and imports Contributions for social insurance Corporate profit taxes Taxes (percent of GDP) Total tax receipts Figure by MIT OpenCourseWare.
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Fiscal Policy Fiscal policy is the use of government spending G and taxes T Objective: stabilize the economy Governments can have: utput targets Output targets Price targets Unemployment targets Stabilizing the economy means moving the economy towards its targets. We will ignore price targets for now (we have no prices in our model yet). •S u ppose the government has an output target and suppose that target is Y* (we will also explain why Y* is a good target later in the course). Fiscal policy then would be the manipulation of G and T to move the economy towards Y*. ( Assumes government knows where Y* is - we will discuss other drawbacks to 7 fiscal policy later in the course).
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Example: Loss in Consumer Confidence •Assume we start at Y* SRAS(W 0 ) P P 0 AD(C 0 ) Y* 0 Y LM(P 0 ) r IS(C 0 ) 8 Y* 0 Y
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Example: Loss in Consumer Confidence •Loss of Consumers’ Confidence SRAS(W 0 ) P P 0 AD(C M P 1 A B M(M ( 0 , 0 ) Y* 0 Y AD(C 1, M 0 ) Y 1 C LM(M 0 ,P 0 ) r LM(M 0 ,P 1 ) A IS(C 0 ) (C B C 9 Y* 0 Y Y 1 IS(C 1 )
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Fiscal Policy •Loss of Consumers’ Confidence SRAS(W 0 ) P P 0 AD(C M P 1 A=D B M(M ( 0 , 0 ) Y* 0 Y AD(C 1, M 0 ) Y 1 C LM(M 0 ,P 0 ) r LM(M 0 ,P 1 ) A IS(C 0 ) (C B C D 10 Y* 0 Y Y 1 IS(C 1 )
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This note was uploaded on 11/18/2011 for the course ECON 14.02 taught by Professor Veronicaguerrieri during the Fall '09 term at MIT.

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MIT14_02F09_lec18_19 - Government and Fiscal Policy Fi...

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