Chapter13: Fiscal Policy, Deficits, and Debt
AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:
Identify and explain the purposes, tools, and limitations of fiscal
Explain the role of built-in stabilizers in moderating business
Describe how the cyclically adjusted budget reveals the status of
U.S. fiscal policy.
Discuss the size, composition, and consequences of the U.S.
ORIGIN OF THE IDEA
In the previous chapter we saw that an excessive increase in aggregate
demand can cause demand-pull inflation and that a significant decline in
aggregate demand can cause recession and cyclical unemployment. For
these reasons, the Federal government sometimes uses budgetary actions to
try to “stimulate the economy” or “rein in inflation.” Such countercyclical
Changes in government spending and tax collections designed to
achieve a full-employment and noninflationary domestic output; also called
discretionary fiscal policy.
consists of deliberate changes in government
spending and tax collections designed to achieve full employment, control
inflation, and encourage economic growth. (The adjective “fiscal” simply
We begin this chapter by examining the logic behind fiscal policy, its current
status, and its limitations. Then we examine a closely related topic: the U.S.
Our discussion of fiscal policy and public debt is very timely. In 2009,
Congress and the Obama administration began a $787 billion stimulus
program designed to help lift the U.S. economy out of deep recession. This
fiscal policy contributed to a $1.4 trillion Federal budget deficit in 2009, which
increased the size of the U.S. public debt to $11.9 trillion.
Fiscal Policy and the AD-AS Model
The fiscal policy just defined is
(or “active”). It is often initiated on
the advice of the president's Council of Economic Advisers (CEA)
A group of
three persons that advises and assists the president of the United States on
economic matters (including the preparation of the annual Economic Report
of the President).
a group of three economists appointed by the president to
provide expertise and assistance on economic matters. Discretionary changes
in government spending and taxes are
at the option
of the Federal
government. They do not occur automatically. Changes that occur without
congressional action are
(or “passive” or “automatic”), and
we will examine them later in this chapter.
Expansionary Fiscal Policy
When recession occurs, an expansionary fiscal policy
An increase in
government purchases of goods and services, a decrease in net taxes, or
some combination of the two for the purpose of increasing aggregate demand
and expanding real output.
may be in order. This policy consists of
government spending increases, tax reductions, or both, designed to increase
aggregate demand and therefore raise real GDP. Consider
This is the end of the preview. Sign up
access the rest of the document.