Ch11-12,PDF - 3/31/2011 • In Ch. 11, you may choose to...

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Unformatted text preview: 3/31/2011 • In Ch. 11, you may choose to stop reading Ch. at bottom of pg. 245 to the end of the chapter. We will not be covering in class (and thus,won’t be on any midterm exam) from ‘Keynesian Aggregate Expenditure Model to the end of Ch. 11. Model,’ to the end of Ch. 11. What is fiscal policy? • Changes in –G –T – Debt – USED to affect changes in the business cycle – Is it effective: – NO! – So why do we study this? – it’s what Gov’t uses today • Can the private market provide Opera? • If so, why does the government provide • • • OPERA but not haircuts? What is a marriage tax? Is it benevolent to TAKE from one person to give to another, without the first person permission? Basically, is our person’s permission? Basically, is our government government benevolent? Do people act as if, or do you think some people believe our government to be benevolent? Ch. Ch. 11 Fiscal Policy Fiscal Policy & Size of Government Size CW 11.1 • Name 7 taxes we pay • Name 7 things the government provides to us • Is it benevolent to TAKE from one person to give to another, without the first person’s permission? Basically, was Robin Hood benevolent? VIDEO – Is government getting too big? Terms: • Fiscal Policy • Discretionary Fiscal Policy • Budget Deficit 1 3/31/2011 Real Federal Spending Per Person, 1800-2010 1800- Source: U.S. Census Bureau, Historical Statistics of the United States, and Economic Report of the President. Real Federal Deficit Per Person, 1965-2010 1965- Real Federal Spending Per Person, 1980-2010 1980- Source: U.S. Census Bureau, Historical Statistics of the United States, and Economic Report of the President. Federal Spending as a Share of GDP, 1990-2011 1990- Source: U.S. Office of Management and Budget. But was the private sector growing faster than the public sector during our most recent recession? 100,000 government jobs created, 7 million private sector jobs lost 2 3/31/2011 Size and Growth of the U.S. Government – Is it Democrat or Republican caused? Size and Growth of the U.S. Government – by Presidential party : Democrat president or Republican president? slide 14 of 33 Total Bush Bailout/Stimulus, Nov. 2008 Gross Federal Debt as a Share of GDP, 1945-2011 1945- Source: U.S. Office of Management and Budget. Net Federal Debt as a Share of GDP, 1945-2015 1945Dem Dem Rep Rep Dem Rep Source: U.S. Office of Management and Budget. Dem Rep Dem • http://zfacts.com/p/318.html 3 3/31/2011 Share of Net Federal Debt Held by Foreigners: 1970, 1990, 2010 Aging of the U.S. Population, 1990-2030 Source: U.S. Census Bureau. The figures for 2020 and 2030 are projections. Government Spending as a Percent of GDP Video: So, how large is the U. S. Debt, actually? But don’t we NEED all this government spending to help poor Americans? Video: 4 3/31/2011 So if we have so much debt, what can we do? Will we decrease spending? • $100 million out of $3.5 Trillion • Increase taxes • Decrease spending Terms: Terms: • • • • • • Fiscal Policy Discretionary Fiscal Policy Budget Deficit – Oct. 2009 -- $1.4 Trillion Budget Surplus – National Debt -- Debt Clock ( http://www.usdebtclock.org/ ) http://www.usdebtclock.org/ Crowding out….. Video: Terms: • • • • • • Fiscal Policy Discretionary Fiscal Policy Budget Deficit – Oct. 2009 -- $1.4 Trillion Budget Surplus – National Debt -- Debt Clock Crowding Out Terms: • • • • • • • • • Fiscal Policy Discretionary Fiscal Policy Budget Deficit – Oct. 2009 -- $1.4 Trillion Budget Surplus – HA! National Debt -- Debt Clock Crowding Out Where does the Gov’t get its money? Difference between the FED and the Treasury The Multiplier (Ch. 11, pp. 238 – 240) 5 3/31/2011 • Multiplier – If the MPC is 75%, how much would a $100 million increase in G increase GDP, according to a Keynesian? – Why might it NOT happen? – Crowding OUT!!! Remember….Keynes is a • Aggregate Demand kind of guy kind • Countercyclical policy kind of guy • Fiscal policy kind of guy kind • Short run kiind of guy k Terms: • • • • • • • • • • Fiscal Policy Discretionary Fiscal Policy Budget Deficit – Oct. 2009 -- $1.4 Trillion Budget Surplus – HA! National Debt -- Debt Clock Crowding Out Where does the Gov’t get its money? Difference between the FED and the Treasury The Multiplier (Ch. 11, pp. 238 – 240) Keynesian Fiscal Policy recommendations Keynesian Fiscal Policy To Keynes, what is unemployment? LITTLE AD too LITTLE AD To Keynes, what is inflation? too MUCH AD MUCH If Unemployment is too LITTLE AD, what’s the cure? cure? increase AD AD If Inflation is too MUCH AD, what’s the cure? cure? decrease AD Remember: Keynes is a FISCAL POLICY kind of guy….. Keynesian Fiscal Policy • To cure unemployment using Fiscal Policy: – You need to INCREASE AD: INCREASE • Government spending? – INCREASE IT!! • Expansionary FP • Contractionary (Restrictive) FP • Taxes? – DECREASE THEM!! THEM!! • To cure inflation using Fiscal Policy: – You need to DECREASE AD: DECREASE • Government spending? – DECREASE IT!! • Taxes? – INCREASE THEM!! 6 3/31/2011 Ch. Ch. 12 – Fiscal Policy, Borrowing and Crowding Out End of Ch. 11 Begin Ch. 12 How does fiscal policy work? • Business cycle • Counter cyclical policies – Keynesian Definition of Unemployment & Inflation Inflation – Cures? Change AD – To Stimulate…decrease Taxes, increase G – To Stifle economy…increase T, decrease G But do we NEED activist fiscal policy like Keynes recommended? Self-correcting mechanism: •If AD falls: •lower APL causes resource prices to drop, making SRAS increase •Lower interest rates make investment demand interest rates make investment demand increase (which shift AD right). •If AD rises: •higher APL causes resource prices to RISE, making SRAS fall •Higher interest rates make investment demand fall (which shifts AD left). • New Classical Model • Counter cyclical policy • Paradox of Thrift • Supply Siders & Taxes Sid But do we NEED activist fiscal policy like Keynes recommended? Remember: Wages DO fall during a recession!! That’s the SelfSelf-correcting Mechanism.. Mechanism.. • RELATED: automatic stabilizers: automatic – Unemployment compensation • US enters recession • Income falls • Keynesian cure is to decrease T and increase G • T automatically falls (less income = less tax revenue) • G automatically increases (unempl. Comp. kicks in) – Progressive Income tax • Boom period • Incomes rise, higher tax brackets, taxes rise • Chokes off spending (like Keynes wanted) • Vice versa if recession hits…incomes fall… 7 3/31/2011 Problems with using FP • Why did people start to think Keynesian Econ was not a good policy? – Stagflation – timing • Timing • If Government increases spending to reduce unemployment but the economy has already started to recover… – May lead to inflation • If the government increases taxes to reduce inflation but the economy has already started to recover… – May lead to unemployment New Classicalists – is current consumption and saving affected by budget deficits? • Keynesians say yes say yes • NEW CLASSICALISTS? – Ricardian Equivalence Theorem – Paradox of Thrift • Ricardian Equivalence -- tax reductions (paid for with debt, not less G) will have no effect on current C and AD. – Why? People know and will not spend the $$ but will save it instead • Paradox of thrift – fallacy of composition – If one saves, good – If ALL save…..bad? • No….because real ir will fall, increasing Inv. demand New Classicalists – • DO NOTHING!!! NOTHING!!! • WHY? – Multiplier does work – Crowding out – timing – Ricardian Equivalence Theorem – Paradox of Thrift New Classicalists – • DO NOTHING!!! NOTHING!!! Supply Supply Siders • Negative impact on supply from a change in taxes… – It may cause workers to work LESS – That leads to a decrease in Aggregate Supply when government was trying to impact Aggregate Demand. 8 3/31/2011 To a supply sider, FP does not sider, work to stimulate AD, but if you decide to use FP ANYWAY: • A decrease in taxes is preferred over Crowding OUT is 1. An increase in budget deficits which lowers the interest rate 2. When the government borrows more to increase in G – Reversible (No constituency) (No constituency) – Much quicker – No timing problem – Incentive affect on AS (PMA) Which of the following (PMA) statements statements are true, ceteris paribus? 1. The US Treasury increases the money 2. 3. 4. 5. supply each time it sells bonds The US Treasury decreases the money supply each time it sells bonds The Fed increases the money supply each time time it buys bonds The Fed decreases the money supply each time it buys bonds It doesn’t matter as the FED and the US Treasury are basically the same thing. 3. 4. finance deficits and that raises the interest rate for the private sector An increase in the growth rate of the An increase in the growth rate of the nominal nominal money supply over and above any increase in real GDP 8 years of U. S. budget deficits in a row. • S&D question • Florida government has reported that there will be tough new sanctions levied against people selling illegal drugs in Florida. Ceteris paribus, what would you expect to happen to the market price and expect to happen to the market price and quantity quantity of street drugs in FL as a result of this new policy? What would happen to total revenue for drug sellers? S&D questions S&D question • If consumers are expecting a big • If consumers are expecting a big • increase to their income (say, from coming out of a recession), what would you expect to happen to the market P & Q of automobiles? If the wealth of consumers increases, increase to their income (say, from coming out of a recession), what would you expect to happen to the market P & Q of U. S. goods and services? (or if real interest rates fall or if income abroad increases or if consumer sentiment index increases) what would you expect to happen to the average price level and real output in the economy? 9 3/31/2011 End of Ch. 12 End of Ch. 12 10 ...
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