Chapter 13 - chapter: 13 FiscalPolicy > 1 of 51 WHAT YOU...

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1 of 51 chapter: 13 >> Fiscal Policy
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2 of 51 WHAT YOU WILL LEARN IN THIS CHAPTER What fiscal policy is and why it is an important tool in managing economic fluctuations Which policies constitute an expansionary fiscal policy and which constitute a contractionary fiscal policy Why fiscal policy has a multiplier effect and how this effect is influenced by automatic stabilizers Why governments calculate the cyclically adjusted budget balance
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3 of 51 WHAT YOU WILL LEARN IN THIS CHAPTER Why a large public debt may be a cause for concern Why implicit liabilities of the government are also a cause for concern
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4 of 51 Government Spending and Tax Revenue for Some High-Income Countries in 2006
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5 of 51 Sources of Tax Revenue in the U.S., 2007
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6 of 51 Government Spending in the U.S., 2007 Social insurance programs are government programs intended to protect families against economic hardship.
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7 of 51 The Government Budget and Total Spending Fiscal policy is the use of taxes, government transfers, or government purchases of goods and services to shift the aggregate demand curve.
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8 of 51 Expansionary and Contractionary Fiscal Policy Expansionary Fiscal Policy Can Close a Recessionary Gap Expansionary fiscal policy increases aggregate demand. Recessionary gap
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9 of 51 Expansionary and Contractionary Fiscal Policy Contractionary Fiscal Policy Can Eliminate an Inflationary Gap Contractionary fiscal policy reduces aggregate demand. Inflationary gap
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10 of 51 A Cautionary Note: Lags in Fiscal Policy In the case of fiscal policy, there is an important reason for caution: there are significant lags in its use. Realize the recessionary/inflationary gap by collecting and analyzing economic data takes time Government develops a spending plan takes time Implementation of the action plan (spending the money takes time
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11 of 51 Fiscal Policy and the Multiplier Fiscal policy has a multiplier effect on the economy. Expansionary fiscal policy leads to an increase in real GDP larger than the initial rise in aggregate spending caused by the policy. Conversely, contractionary fiscal policy leads to a fall in real GDP larger than the initial reduction in aggregate spending caused by the policy.
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12 of 51 Fiscal Policy and the Multiplier
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13 of 51 Multiplier Effects of Changes in Taxes and Government Transfers Ex: The government hands out $50 billion in the form of tax cuts. There is no direct effect on aggregate demand by government purchases of goods and services; GDP goes up only because households spend some of that $50 billion. How much will they spend?
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This note was uploaded on 12/20/2011 for the course ECON 2006 taught by Professor Rdcothren during the Fall '08 term at Virginia Tech.

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Chapter 13 - chapter: 13 FiscalPolicy > 1 of 51 WHAT YOU...

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