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    Eco 200 - Principles of Macroeconomics: Chapter 12:fiscal Policy

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    Lindcelle Jane Dalope
    This document summarizes key topics in fiscal policy from an economics textbook chapter, including: 1) The three regions of fiscal policy - Keynesian, intermediate, and classical; 2) Government spending and tax multipliers; 3) How government spending is financed through taxes, debt, or money creation; 4) Automatic stabilizers versus discretionary policy; and 5) Potential costs and effects of budget deficits like crowding out.

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    Eco 200 - Principles of Macroeconomics: Chapter 12:fiscal Policy

    Uploaded by

    Lindcelle Jane Dalope
    39 views19 pages
    This document summarizes key topics in fiscal policy from an economics textbook chapter, including: 1) The three regions of fiscal policy - Keynesian, intermediate, and classical; 2) Government spending and tax multipliers; 3) How government spending is financed through taxes, debt, or money creation; 4) Automatic stabilizers versus discretionary policy; and 5) Potential costs and effects of budget deficits like crowding out.

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    CHAPTER 12 - FISCAL POLICY

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    This document summarizes key topics in fiscal policy from an economics textbook chapter, including: 1) The three regions of fiscal policy - Keynesian, intermediate, and classical; 2) Government spending and tax multipliers; 3) How government spending is financed through taxes, debt, or money creation; 4) Automatic stabilizers versus discretionary policy; and 5) Potential costs and effects of budget deficits like crowding out.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    39 views19 pages

    Eco 200 - Principles of Macroeconomics: Chapter 12:fiscal Policy

    Uploaded by

    Lindcelle Jane Dalope
    This document summarizes key topics in fiscal policy from an economics textbook chapter, including: 1) The three regions of fiscal policy - Keynesian, intermediate, and classical; 2) Government spending and tax multipliers; 3) How government spending is financed through taxes, debt, or money creation; 4) Automatic stabilizers versus discretionary policy; and 5) Potential costs and effects of budget deficits like crowding out.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 19

    Eco 200 – Principles of

    Macroeconomics

    Chapter 12:Fiscal Policy


    Fiscal Policy – Keynesian
    region
    Fiscal policy – intermediate
    region
    Fiscal policy – classical region
    Multipliers
     Government spending multiplier =
    1 / (MPS + MPI)
     Lump-sum tax multiplier =
    -(MPC-MPI) / (MPS + MPI)
     Balanced-budget multiplier = effect of
    equal changes in G and T = 1
    Government budget constraint
     Government spending = taxes +
    change in government debt + change in
    government-issued money
    Tax finance of government
    spending
     Balanced-budget multiplier = 1
     Offsetting effects:
     Incentive effects may reduce labor supply
    and cause a reduction in AS
     Laffer curve
    Deficit financing of
    government spending
     Ricardian equivalence:
     Individuals may save more in response to
    higher expected future taxes
     Crowding out:
     Increased borrowing leads to higher
    interest rates; resulting in a reduction in I
    and C (discussed more extensively shortly)
    Monetary expansion used to
    finance government spending
     Due to autonomy of Fed, this is less
    likely to occur in the U.S. today.
     If used, tends to be inflationary,
    resulting in a reduction in C.
    Discretionary fiscal policy vs.
    automatic stabilizers
     Discretionary fiscal policy: changes in government
    spending, taxes, and/or transfer payments to
    achieve a macroeconomic policy goal
     Automatic stabilizers: automatic increase in
    transfers and tax reductions as income falls (the
    reverse holds when income rises)
     Examples: unemployment compensation, income tax,
    welfare programs.
     Automatic stabilizers reduce the value of the
    multiplier.
    Tax structures
     Proportional tax: Tax / income is
    constant as income rises
     Progressive tax: Tax / income rises as
    income rises
     Regressive tax: Tax / income declines
    as income rises
    Deficits and debt
     Deficit = G – T = amount by which
    government spending exceeds net taxes
     Debt = total stock of outstanding
    government bonds
     Deficit = a flow variable
     Debt = a stock variable
    Deficits, interest rates, and
    investment
     Loanable funds model
    Demand for loans
    Supply of loans
    Equilibrium
    Increase in deficit
    Costs of deficit
     Crowding out: higher interest rates result in
    less investment
     Higher deficit results in currency appreciation
    and a decline in net exports (X)
     Interest payments – redistribution of income
     Regressive?
     Foreign debt holdings
    Foreign fiscal policy
     Share of GDP devoted to G is smaller in
    the U.S. than in most developed
    economies
     Value-added taxes are commonly used
    in most other developed economies

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