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Unformatted text preview: INSTRUCTOR COMMENTARY Chapter Reference: Chapter 11 Fiscal Policy 1. Chapters focuses on the following important concepts: A. The concept of fiscal policy. Fiscal policy relates to taxing, spending, and borrowing activities of the federal government. Because nearly all state and local governments have balanced annual budget requirements, the fiscal policies discussed in this module relate only to federal government actions. There is no legal constraint on the federal government to balance its budget in any given year. (text, p. 283) B. The types of fiscal policy. Fiscal policies may be discretionary, or nondiscretionary. The former refers to specific fiscal actions taken by the federal government to cause the level of real GDP, employment and the price level to change. Two types of discretionary fiscal policy are discussed in this module: (1) those that shift the AD schedule; and (2) those that shift the AS schedule. Non-discretionary fiscal policies also termed the automatic fiscal stabilizers are policies legislated in advance by the Congress that go to work automatically as the level of real GDP rises and falls. They influence the extent to which any given discretionary fiscal policy will cause the AD schedule to shift. (text, p. 283 and p. 293) C. How demand-side fiscal policy affects the AD schedule. Demand-side fiscal policies are designed to shift the AD schedule to the right or to the left. Increases in government expenditures, a reduction in tax collections, a combination of both, or an increase in the size of a balanced budget all have the affect of shifting the AD schedule to the right. The extent of this rightward shift depends on the magnitude of the initial change and the value of the aggregate expenditures multiplier. Each fiscal policy has a multiplier effect. In this module the following multipliers have been presented: (1) the multiplier for a change in government expenditures, tax collections constant, is calculated as the reciprocal of the MPS; (2) the multiplier for a change in tax collections, government expenditures 1 constant, is calculated as MPC/MPS; and (3) equal changes (either increases or decreases) in government expenditures and tax collections by equal amounts will have a multiplier effect of 1 (that is, for each $1 change in G and Tx combined, the AD schedule will shift by $1). (text, pp. 284-293) D. How demand-side fiscal policy affects the level of real GDP and the price level. The impact of an initial shift in the AD schedule depends on the shape of the AS schedule. The more nearly horizontal is the AS schedule (tending towards the Keynesian range), the greater will be the impact on real GDP and the smaller will be the effect on the price level. The more nearly vertical is the AS schedule (tending towards the Classical range) the smaller will be the impact on real GDP and the greater will be the effect on the price level. . (text, pp....
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