Fiscal Policy Deficits and Debt Ch 17 Fiscal
Fiscal Policy, Deficits, and Debt Ch 17
Fiscal Policy and Potential Output • Potential Output- economy’s maximum sustainable output in the long run (full employment output) • Recession gap- output below potential in short run • Expansionary gap- output exceeding potential (Black Friday)
Rise of Fiscal Policy • Classical economists- Laissez-faire, hands off, Adam Smith • Annual balanced budget • The Great Depression and Keynes • The Multiplier Effect- any change in fiscal policy affects aggregate demand by more than from original change in spending or taxes • Increase in government spending, or cutting taxes increases aggregate demand
Rise of Fiscal Policy • • WWII spending puled us out of the depression Employment Act of 1946 Promote full employment and price stability 2009 Stimulus Package designed to increase aggregate supply
Fiscal Policy Tools • Discretionary fiscal Policy- requires congressional and presidential action to change government spending or taxes • Automatic Stabilizers- taxing and spending programs, adjust to ups and downs to stabilize disposable income(post tax income) • Unemployment insurance • Welfare payments • Progressive income tax
Problems with discretionary fiscal policy • Stagflation- decrease in aggregate supply causing increase in inflation and unemployment • Fiscal Policy and Aggregate Supply
Problem of Lags • • Recognition lag Decision-Making Lag Implementation Lag Effectiveness Lag
Great Recession • • Dec 2007 US economy Entered Recession Housing Bubble Burst Foreclosures Less loans
Fiscal Policy During the Great Recession • TARP bill enacted to stimulate economy in early 2008 • $168 Billion • $600 one time tax rebate • Most saved rebate and didn’t spend it • 2 nd Quarter 190, 000 jobs lost • 3 rd Q 334, 000 jobs lost
Recovery Act of 2009 • Obama elected president • Recovery Act of 2009 sighed in February • • $787 billion stimulus package 37% tax benefits 28% funded entitlements (such as Medicaid) 35% Grants contracts and loans (”shovel ready” infrastructure projects) • Aimed at aggregate Supply
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