--Formula: Government spending multiplier (assumes SRAS is horizontal) Gov’t spending multiplier = change in equilibrium RGDP / change in G --Formula: Keynesian Tax Multiplier (assumes SRAS is horizontal) Tax Multiplier = change in equilibrium RGDP / change in T 39. Impact of fiscal policy on the economy 40. Fiscal policy and the Great Recession Congress passed the American Recovery and Reinvestment Act (ARRA 2009) 41. ARRA and its impact on the U.S. economy ARRA - $840 billion package of spending increases and tax cuts; the largest fiscal policy action in US history; approximately 2/3 of the stimulus included G expenditures and 1/3 took the form of tax cuts. 42. The government debt versus the deficit Debt – refers to the total value of all Gov’t deficits and surpluses Deficit – When T-G < 0, otherwise when the Gov’t spends more than it takes in. 43. Largest sources of government revenue Social Insurance Taxes 44. Largest components of government spending
Transfer Payments 45. Transfer payments--examples: medicare, social security 46. Is the national debt a problem? Yes, because S = Sgov’t + Sprivate so when the debt increases saving decreases and interest rates rise 47. Crowding out Increases in G pushes up interest rates and crowds out C, I, and NX (they fall) 48. Limits of fiscal policy 1) Recognition of Fiscal Policy – it takes time to recognize changes in the economy 2) Getting the timing right can be more difficult for fiscal policy compared to monetary policy 3) Policy lag – see def. 4) Impact lag – see def. Current Events : These articles are posted under the Final Exam Review page under the Final Exam module - Employment Report, 12/2/16: See “U.S. Nonfarm Payrolls Rose 178,000 in November; Unemployment Rate Falls to 4.6%”, Jeffrey Sparshott, WSJ, 12/2/16. - FOMC Meeting December 13-14, 2016 : “Fed Rate Rise Could Come ‘Relatively Soon’ as Data Point to Stronger Economy,” Kate Davidson, 11/17/16.
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