Chapter 9 Fiscal Policy Fiscal Policy Definition Stabilization
Chapter 9 Fiscal Policy
Fiscal Policy Definition - Stabilization of the economy using government spending and taxation o Employment Act of 1946 n Defined government's role n Created the Council of Economic Advisors to advise the President n Created the Joint Economic Committee of Congress to investigate our economic problems o
Budget Types n Deficits: G > T n Surplus: T > G n Balanced: G = T
Discretionary Fiscal Policy n Deliberate use of G and T n Gaps o Expansionary Gap: Decrease AD n n n Decrease G Increase T Surplus Budget o Contractionary Gap: Increase AD n n n Increase G Decrease T Deficit Budget
Other Policy Options n Incomes policies – monitoring wages and prices n Industrial Policy –aiding lagging industries that are most likely to be successful
Supply Side Fiscal Policy n Lower business taxes n Deregulate industries n Promote research and development with subsidies and grants n Low interest loans to businesses for capital loans n Manpower programs n Laffer Curve
Problems n Automatic Stabilizers: o Recession: G up and T down o Inflation: G down and T up n Time lags o Recognition (Data): Identify the problem o Wait and See: Wait and see if the problem will correct itself o Administrative(Legislative): Deciding what to do and implementing it o Transmission: Put policy into effect o Operational(Effectiveness): Impacts are felt
Problems (cont. ) n Politics: Government has other things to do n RUO's - 75% of the budget is fixed by law n Economists problems o What is the multiplier? o What is the Potential GDP? o How much should we change spending or taxes?
Economic indicators n Leading economic indicators - predict the economy six months in advance n Coincident – what’s happening now n Lagging – after effects
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