Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition
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Copyright ©2001, South-Western College Publishing Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition Chapter 13: Fiscal Policy and the Federal Budget
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Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition. Chapter 13: Fiscal Policy and the Federal Budget. Fiscal Policy. Expansionary fiscal policy. AS 0. Price level (price index). Full employment output. A. B. Increase in output. AD 0. AD 1. Fiscal Policy. - PowerPoint PPT Presentation
Transcript of Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition
Copyright ©2001, South-Western College Publishing
Contemporary Economics:An Applications ApproachBy Robert J. Carbaugh1st Edition
Chapter 13:
Fiscal Policy and the Federal Budget
Carbaugh, Chap. 13 2
Expansionary fiscal policyFiscal Policy
AD0
Pri
ce l
eve
l (p
ric
e in
dex
)
AD1
A
AS0
B
Increase in output
Full employment output
85
90
95
100
105
110
115
120
125
130
650 700 750 800 850 900 950
Real output ($ bill.)
Carbaugh, Chap. 13 3
Expansionary fiscal policy and the multiplier
Fiscal Policy
AD0
Pri
ce l
eve
l (p
ric
e in
dex
)
AD1
A
AS0
B
Indirect effect of increased consumption
spending
C
AD2
Direct effect of an increase in government
spending
85
90
95
100
105
110
115
120
125
130
650 700 750 800 850 900 950
Real output ($ bill.)
Carbaugh, Chap. 13 4
Contractionary fiscal policyFiscal Policy
AD0
Pri
ce l
eve
l (p
ric
e in
dex
)
AD1A
AS0
B
900 1,100
Fall in price level
Fall in price level Full
employment90
100
110
120
130
140
100
Real output ($ bill.)
Carbaugh, Chap. 13 5
Crowding-out effect
Fiscal Policy
Government spendingexceeds taxes, resulting
in a budget deficit.
The government entersthe loanable funds market
and issues more securities.
As the demand for loanablefunds rises, interest
rates increase.
Firms and householdspurchase less machinery,
equipment, autos, and homes.Thus government spending
crowds out privatesector spending.
Carbaugh, Chap. 13 6
A more dismal view ofsupply-side tax cuts
AS0
Pri
ce l
eve
l (p
ric
e in
dex
)
AD0
A
B
AS1
Supply-side fiscal policyFiscal Policy
The goal of supply-sidetax cuts
AS0
Pri
ce l
eve
l (p
ric
e in
dex
)
AD0
A
B
AS1
Increase in real output
Fall in prices
AD1
70
80
90
100
110
120
130
500 700 900 1100 1300 1500
Real output (billion dollars)
70
80
90
100
110
120
500 700 900 1100 1300 1500
Real output (billion dollars)
Carbaugh, Chap. 13 7
The Laffer CurveFiscal Policy
Tax
re
ven
ue
($ b
illi
on
s)
A
48 85
B
100
0
100
200
300
400
0
Tax rate (%)
Carbaugh, Chap. 13 8
Federal debt held by the public
Federal Deficit
Source: Economic Report of the President, 1999
1940 $42.8 $96.5 44.3%1945 235.2 221.4 106.21950 219.0 273.6 80.11955 226.6 395.3 57.31960 236.8 518.2 45.71965 260.8 686.7 38.01970 283.2 1,009.0 28.11975 394.7 1,554.5 25.41980 709.8 2,718.9 26.11985 1,499.9 4,102.1 36.61990 2,410.7 5,684.5 42.41995 3,603.4 7,194.8 50.11998 3,719.9 8,537.9 43.6
Federal GDP Federal debt asYear debt (bill.) (billions) a % of GDP
Carbaugh, Chap. 13 9
Government debt to GDP ratios for selected countries, 1997
Government Debt
Source: IMF, International Financial Statistics, March 1999
Belgium 126Italy 94Hungary 72Sweden 70Finland 69United States 46France 46Japan 45India 44Germany 39
Government debt asCountry a percent of GDP
Carbaugh, Chap. 13 10
Ownership of federal debt, 1998
Federal Debt
Source: Federal Reserve Bulletin, May 1999
Private investors:
individuals, banks,
insurance companies,
etc.38%
Federal Reserve
Banks8%
Foreigners22%
US Treasury and other Federal Agencies and trust funds32%
