Econ+102+lecture+14%2C+2-23-12+-+Fiscal+policy copy

Econ+102+lecture+14%2C+2-23-12+-+Fiscal+policy copy -...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture 14: Fiscal policy Econ 102, Winter 2012 2/23/2012 1 Required reading : Ch. 12: pp. 342 - 346 Ch. 13: pp. 354 - 363
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Outline 1. Countercyclical policy: why? 2. Countercyclical fiscal policy: how? 3. Countercyclical fiscal policy: when? 4. Countercyclical fiscal policy: ought we? 2/23/2012 2
Background image of page 2
Countercyclical policy 2/23/2012 3 Countercyclical policy engages in manipulation that pushes against the tendency of the economy: expansionary in “bad” times, contractionary in “good” times You’ll notice in my introduction that of the traditional “5 Ws”, I skipped “what” and “who”. We’ve already answered those As the title says: the “what” for today is fiscal policy: spending and taxing to manipulate the short run state of the economy As we saw on the first day of class, the “who” of fiscal policy is the president and congress: those with authority to spend and tax
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Countercyclical policy: why? 2/23/2012 4 To answer the first question (“why”), we don’t need to focus on either fiscal or monetary policy Q: Why should any government agency engage in countercyclical policy? A: Countercyclical policy is lifetime-welfare- improving Seems obvious in recessions (more income in the bad times). But why would we do it in expansions as well? The Federal Reserve’s goal was famously said to be “to take away the punch bowl just as the party gets started”
Background image of page 4
Countercyclical policy: why? Note in our first choice that on average the “$1000 certain” people would walk away with the same amount as the “gamble” people (half of whom get nothing, obviously) The key: most people prefer the certain payoff! they are risk averse: given the same expected payoff, people tend to want the “sure thing” prefer not to have the ups and downs of some wins and some losses: want consistent predictable payoffs. They engage in consumption smoothing (this is also why people take out loans when young, pay them when old!) 5 2/23/2012
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Countercyclical policy: why? Another (fiscal) reason that we’ll want to expand in busts and contract in booms is debt: a. expansionary policy creates debt b. but contractionary policy generates surplus, which we can use to pay off debt  Keynesian countercyclical policy is intended to increase social welfare over the long run, and to (at least partially) pay for itself over the “medium run” (from peak to trough of the business cycle) 6 2/23/2012
Background image of page 6
Countercyclical fiscal policy: how? How do we execute this type of policy?
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/10/2012 for the course ECON 102 taught by Professor Rossana during the Winter '08 term at University of Michigan.

Page1 / 26

Econ+102+lecture+14%2C+2-23-12+-+Fiscal+policy copy -...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online