1 Chapter 23 Fiscal Policy: Coping with Inflation and Unemployment Fred Gottheil 10/4/2015 © ©1999...
-
Upload
asher-hines -
Category
Documents
-
view
217 -
download
0
Transcript of 1 Chapter 23 Fiscal Policy: Coping with Inflation and Unemployment Fred Gottheil 10/4/2015 © ©1999...
1
Chapter 23Chapter 23Chapter 23Chapter 23Fiscal Policy: Coping with Fiscal Policy: Coping with Inflation and UnemploymentInflation and Unemployment
Fred GottheilFred Gottheil
04/19/23
©©1999 South-Western College Publishing
2
What is a Fiscal Policy?What is a Fiscal Policy?What is a Fiscal Policy?What is a Fiscal Policy?Government spending
and taxation to achieve full employment without inflation
©©1999 South-Western College Publishing
3
What is the difference between What is the difference between discretionary and discretionary and
nondiscretionary fiscal policy?nondiscretionary fiscal policy?
What is the difference between What is the difference between discretionary and discretionary and
nondiscretionary fiscal policy?nondiscretionary fiscal policy?
Discretionary, newly enacted legislation changing G and T to affect the economy
Nondiscretionary, automatic stabilizers-automatic changes in G and T as the economy changes.
4
Who is unemployed?Who is unemployed?Anyone who is at least 16 years of age and is actively seeking employment
©©1999 South-Western College Publishing
5
Who makes up the Who makes up the Labor Force?Labor Force?
All non-institutionalized people 16 years of age and older who are either working or actively looking for work
©©1999 South-Western College Publishing
6
What is the What is the Unemployment rate?Unemployment rate?
• The number of unemployed people expressed as a percentage of the labor force
• U rate = U/ U + E, where U= unemployed, and E= employed
©©1999 South-Western College Publishing
7
How do we measure How do we measure unemployment?unemployment?
The number of unemployed divided by the labor force,
U rate = U/ U + E
Breakdown of the US Population Breakdown of the US Population and the Labor Force and the Labor Force
Breakdown of the US Population Breakdown of the US Population and the Labor Force and the Labor Force
a
Persons under 16Persons in the armed forcesPersons institutionalized
CivilianNoninstitutionalPopulation
Total PopulationNot in Labor Force
Civilian Labor Force
Employed
Unemployed
9
Who measures Who measures unemployment?unemployment?
The Bureau of Labor Statistics surveys about 60,000 households each month
©©1999 South-Western College Publishing
10
For current data on For current data on unemployment:unemployment:
For current data on For current data on unemployment:unemployment:
http://stats.bls.gov/eag.table.htmlhttp://stats.bls.gov/cpshome.htm
©©1999 South-Western College Publishing
11
What are some of the What are some of the problems in measuring problems in measuring
unemployment?unemployment?
What are some of the What are some of the problems in measuring problems in measuring
unemployment?unemployment?• Discouraged worker
problem• Part time workers• Dishonest workers
12
Who is aWho is aDiscouraged Worker?Discouraged Worker?
A person who drops out of the work force because he or she cannot find a job
©©1999 South-Western College Publishing
13
Are Discouraged Workers Are Discouraged Workers counted in the labor force?counted in the labor force?
No! People who have quit looking for work are not counted as part of the labor force
©©1999 South-Western College Publishing
14
What about part-What about part-time workers?time workers?
Part time workers are counted as fully employed
15
What about people What about people who are over-qualified who are over-qualified
for their jobs?for their jobs?They are still considered
fully employed
©©1999 South-Western College Publishing
16
What’s a dishonest What’s a dishonest worker?worker?
What’s a dishonest What’s a dishonest worker?worker?
Someone who claims to be looking for work but really is not
17
Is the unemployment Is the unemployment rate valid?rate valid?Yes!
As long as we are consistent, we can get an accurate comparison from one time period to the next
©©1999 South-Western College Publishing
18
Can the unemployment Can the unemployment rate increase without rate increase without anyone losing a job?anyone losing a job?
If more people enter the work force than the number of new jobs generated, the unemployment rate increases
©©1999 South-Western College Publishing
19
What are different types What are different types of unemployment?of unemployment?
• Frictional• Structural• Cyclical• Seasonal
©©1999 South-Western College Publishing
20
What is frictional What is frictional unemployment?unemployment?
What is frictional What is frictional unemployment?unemployment?
Unemployment due to normal turnover of the labor force, new entrants to the labor force, re-entrants, job leavers
21
What is structural What is structural unemployment?unemployment?
What is structural What is structural unemployment?unemployment?
Unemployment due to structural changes such as new technologies leading to declines in demand for some jobs
22
What is cyclical What is cyclical unemployment?unemployment?What is cyclical What is cyclical unemployment?unemployment?
Unemployment due to a recession, or downturn in the economy
23
What is the natural rate What is the natural rate of unemployment?of unemployment?
What is the natural rate What is the natural rate of unemployment?of unemployment?
The sum of frictional and structural unemployment
24
What is consideredWhat is consideredFull Employment?Full Employment?
An employment level at which the actual rate of unemployment is equal to the natural rate of unemployment
©©1999 South-Western College Publishing
25
What is considered to be What is considered to be the natural rate of the natural rate of unemployment?unemployment?
The natural rate varies, most estimates are from 4-6%
©©1999 South-Western College Publishing
26
Have more women Have more women entered the work force?entered the work force?
Since the 1950’s there has been a large increase in the number of women in the work force
©©1999 South-Western College Publishing
27
What percentage of What percentage of the work force today the work force today
is female?is female?Almost half
28
What was the What was the unemployment rate unemployment rate
during the worst of the during the worst of the Great Depression?Great Depression?
In 1933, 25% of the labor force was unemployed
©©1999 South-Western College Publishing
29
Why should we care Why should we care about unemployment?about unemployment?Why should we care Why should we care
about unemployment?about unemployment?
Economic costs, lost output and income
Social costs
30
Are there any benefits of Are there any benefits of unemployment?unemployment?
Are there any benefits of Are there any benefits of unemployment?unemployment?
Allocative benefitsDisciplinary benefits
31
What is Inflation?What is Inflation?The general upward
movement in the average level of prices
©©1999 South-Western College Publishing
32
What is Deflation?What is Deflation?The general decrease in
the average level of prices
©©1999 South-Western College Publishing
33
What is the Consumer What is the Consumer Price Index (CPI)?Price Index (CPI)?
A measure of the cost of a fixed “market basket” of consumer goods and services
©©1999 South-Western College Publishing
34
How is the CPI How is the CPI calculated?calculated?
How is the CPI How is the CPI calculated?calculated?
CPI = Value of the market basket in the current period
Value of the market basket in
the base period
35
If the value of the CPI If the value of the CPI equals 120, what does equals 120, what does
this mean?this mean?
If the value of the CPI If the value of the CPI equals 120, what does equals 120, what does
this mean?this mean?The fixed market basket of
goods costs 20% more than in the base period of time
36
Does the makeup of Does the makeup of the CPI change?the CPI change?
As people’s tastes and preferences change, what goes into the basket will change
©©1999 South-Western College Publishing
37
Who measures inflation?Who measures inflation?The Bureau ofLabor Statistics
©©1999 South-Western College Publishing
38
For current data on For current data on inflation:inflation:
For current data on For current data on inflation:inflation:
http://stats.bls.gov/cpshome.htm
©©1999 South-Western College Publishing
39
Problems with the CPIProblems with the CPIProblems with the CPIProblems with the CPI
• Substitution bias• Changes in quality of
goods• Use of retail prices
40
What are the effects of What are the effects of unexpected inflation?unexpected inflation?
What are the effects of What are the effects of unexpected inflation?unexpected inflation?
Inflation redistributes income, some people win, some lose
41
Who wins and who loses Who wins and who loses from inflation?from inflation?
Who wins and who loses Who wins and who loses from inflation?from inflation?
Debtors win, creditors loseReal interest rate =
Nominal rate -expected inflation
42
More winners and losers More winners and losers of inflationof inflation
More winners and losers More winners and losers of inflationof inflation
• Those on fixed incomes lose• Savers often lose• Government sometimes wins• Menu costs of inflation• Inflation psychology develops• Inflation and uncertainty
43
What is aWhat is aRecessionary Gap?Recessionary Gap?
What is aWhat is aRecessionary Gap?Recessionary Gap?
The amount by which aggregate expenditure falls short of a full employment equilibrium, thus giving high unemployment-assume little inflation however
©©1999 South-Western College Publishing
44
The Recessionary GapThe Recessionary Gap
C1+I1+G1+(x-m)1
45o
less than full employment
C2+I2+G2+(x-m)2
full employment
44
Agg
rega
te E
xpen
ditu
re
Real GDP (income)YfY1
45
Fiscal policy to help Fiscal policy to help solve a recessionary gapsolve a recessionary gap
Fiscal policy to help Fiscal policy to help solve a recessionary gapsolve a recessionary gap• Raise government spending• Lower taxes• Attempting to expand or
stimulate the economy• Remember, multiplier effects
46
The Recessionary GapThe Recessionary Gap
C1+I1+G1+(x-m)1
45o
less than full employment
C2+I2+G2+(x-m)2
full employment
46
Agg
rega
te E
xpen
ditu
re
Real GDP (income)YfY1
47
What is anWhat is anInflationary Gap?Inflationary Gap?
What is anWhat is anInflationary Gap?Inflationary Gap?
The amount by which aggregate expenditure exceeds the full employment equilibrium, thus a booming economy, leading to demand pull inflation.
©©1999 South-Western College Publishing
48
The Inflationary GapThe Inflationary Gap
C1+I1+G1+(x-m)1
45o
full employment
C2+I2+G2+(x-m)2
New equilibrium
48
Agg
rega
te E
xpen
ditu
re
GDP (income)Y1Yf
49
Fiscal policy to help Fiscal policy to help solve an inflationary gapsolve an inflationary gap
Fiscal policy to help Fiscal policy to help solve an inflationary gapsolve an inflationary gap• Lower government spending• Raise taxes• Attempting to contract or slow
down the economy
50
The Inflationary GapThe Inflationary Gap
C1+I1+G1+(x-m)1
45o
full employment
C2+I2+G2+(x-m)2
New equilibrium
50
Agg
rega
te E
xpen
ditu
re
GDP (income)Y1Yf
51
What is the formula for What is the formula for the tax multiplier?the tax multiplier?
What is the formula for What is the formula for the tax multiplier?the tax multiplier?
-MPC/MPS
52
Recall the income Recall the income (expenditure) multiplier (expenditure) multiplier of the previous chapter, of the previous chapter, multiplier = 1/MPS, say multiplier = 1/MPS, say government spending government spending
increases by 100 billionincreases by 100 billion
Recall the income Recall the income (expenditure) multiplier (expenditure) multiplier of the previous chapter, of the previous chapter, multiplier = 1/MPS, say multiplier = 1/MPS, say government spending government spending
increases by 100 billionincreases by 100 billion
53
$100 billion$90$81$74
$1,000
...
53
MPC = 9/10MPS = 1/10
54
Now suppose instead of Now suppose instead of raising G by 100, we cut raising G by 100, we cut
taxes by 100--will taxes by 100--will people spend all of the people spend all of the
100 billion?100 billion?
Now suppose instead of Now suppose instead of raising G by 100, we cut raising G by 100, we cut
taxes by 100--will taxes by 100--will people spend all of the people spend all of the
100 billion?100 billion?
55
Answer is No, some will Answer is No, some will be saved--assume again be saved--assume again MPC=.9, MPS=.1, thus MPC=.9, MPS=.1, thus 90% of tax cut is spent 90% of tax cut is spent
or 90 billion initial or 90 billion initial change in spendingchange in spending
Answer is No, some will Answer is No, some will be saved--assume again be saved--assume again MPC=.9, MPS=.1, thus MPC=.9, MPS=.1, thus 90% of tax cut is spent 90% of tax cut is spent
or 90 billion initial or 90 billion initial change in spendingchange in spending
56
$100 billion$90$81$74
1,000
...
56
MPC = 9/10MPS = 1/10
900
57
Thus since -100 = tax cut, and GDP grew by 900, we have a tax multiplier of -9
Using the tax multiplier, initial change in taxestimes the tax multiplier equals the maximum
change in GDP
58
Practice with the tax Practice with the tax multipliermultiplier
Practice with the tax Practice with the tax multipliermultiplier
Tax cut = 5 billion, MPC = .75, what is the maximum ΔGDP?
Tax increase = 10 billion, MPS = .4, what is the maximum ΔGDP?
Tax cut of 8 billion, MPC = 2/3, what is the maximum ΔGDP?
59
Answers:Answers:Answers:Answers:
1. 15 billion2. -15 billion3. 16 billion
60
Why are Fiscal Policies Why are Fiscal Policies to stem a Recessionary to stem a Recessionary Gap not problem free?Gap not problem free?
Why are Fiscal Policies Why are Fiscal Policies to stem a Recessionary to stem a Recessionary Gap not problem free?Gap not problem free?
• Spending becomes permanent• Ignores the self-correcting
nature of the economy• It can be very expensive
©©1999 South-Western College Publishing
61
Why are Fiscal Policies Why are Fiscal Policies to stem an Inflationary to stem an Inflationary Gap not problem free?Gap not problem free?
Why are Fiscal Policies Why are Fiscal Policies to stem an Inflationary to stem an Inflationary Gap not problem free?Gap not problem free?
To cut government spending or raise taxes can be politically unpopular
©©1999 South-Western College Publishing
62
Other problems with fiscal policyOther problems with fiscal policy Other problems with fiscal policyOther problems with fiscal policy Time lags: Can we time fiscal policy
correctly?1. Recognition lag, time between a
change in the economy and our realizing it
2. Administrative lag, time for congress to act, pass laws, etc.
3. Impact lag, time for policy to actually have its effect, multipliers to work, etc.
63
Time lags could cause 2 Time lags could cause 2 problemsproblems
Time lags could cause 2 Time lags could cause 2 problemsproblems
1. Miss the boat, problem over before policy gets going
2. Destabilize, rather than stabilize the economy
64
Another possible problem with Another possible problem with fiscal policy, crowding outfiscal policy, crowding out
Another possible problem with Another possible problem with fiscal policy, crowding outfiscal policy, crowding out
Say Raise G to stimulate economy, borrow the money by selling bonds, could raise interest rates, lead to less investment and consumption--thus the higher G spending “crowds out” private sector spending.
65
Keynesians see little crowding Keynesians see little crowding out in recessionary timesout in recessionary times
Keynesians see little crowding Keynesians see little crowding out in recessionary timesout in recessionary times
Could in fact be that increased G spending, if output begins expanding, might raise optimism and increase investment and consumption rather than crowd it out.
66
For information on For information on government spending:government spending:
For information on For information on government spending:government spending:
http://www.access.gpo.gov/su_docs/budget/index.html
http://www.cato.orghttp://www.publicdebt.treas.govhttp://www.concordcoalition.org
©©1999 South-Western College Publishing
67
What is the Balanced What is the Balanced Budget Multiplier?Budget Multiplier?
What is the Balanced What is the Balanced Budget Multiplier?Budget Multiplier?
When the government increases spending and taxes by equal amount, what will be the combined effect on output, taking both multipliers into account?
©©1999 South-Western College Publishing
68
Say both G and T increase by Say both G and T increase by 20 billion, MPC = .8, MPS=.220 billion, MPC = .8, MPS=.2Say both G and T increase by Say both G and T increase by 20 billion, MPC = .8, MPS=.220 billion, MPC = .8, MPS=.2
G: 20 billion x 1/MPS, gives 20 billion x 5 = 100 billion increase in GDP
T: 20 billion x -MPC/MPS gives 20 billion x -4 = -80 billion drop in GDP
Total effect, 100 + -80 = 20, the initial change in spending
Thus multiplier = 1
69
What does the Balanced What does the Balanced Budget Multiplier Budget Multiplier
always equal?always equal?
What does the Balanced What does the Balanced Budget Multiplier Budget Multiplier
always equal?always equal?ONE
©©1999 South-Western College Publishing
70
• Who is unemployed?• Who makes up the labor force?• Can the unemployment rate increase
without anyone losing a job?• What is Full Employment?• What is Inflation?
71
•Who loses from Inflation?•Who gains from Inflation?•What is a Recessionary Gap?•What is an Inflationary Gap?•What is a Fiscal Policy?•What is a Balanced Budget?•What is the Balanced Budget Multiplier?