Fiscal policy SFLS

Fiscal Policy

Introduction to Fiscal Policy

3.) Fiscal Budget and Problems

1.) Goals and Types of Fiscal Policy

2.) How Fiscal Policy is Done

4.) Fiscal Policy Limitations

- is the use of the federal budget to

sustain economic growth and smooth

连出 the business cycle.

Fiscal Policy

AD = C + I + G + (X – M)

- is the use of taxes, government

transfers, or government

purchases of goods and services

to shift the AD curve.

Reworded definition: 换句话说


Time

Long Run

Short Run

In the short run things go up and down and can be quite volatile挥发物

Business Cycle

Econ

Growth



the business cycle.

Fiscal Policy

- Basically,

fiscal policy

aims to

stabilize

economic

growth,

avoiding a

boom and

bust economic

cycle.

- An increase in government spending

or decrease in taxes to increase AD.

Expansionary

Fiscal Policy

AD = C + I + G + (X – M)

Inflationary

Fiscal Policy

or

Government spending

Taxes

***Ceteris Paribus

Definition with arrows: 换句话说

Shifts AD rightor / and


AD = C + I + G + (X – M)

Government spending

Price

level

GDP

AD

SRAS

PE

LRAS

YN Y1

P1

AD1


- Government spends

more in the economy

and makes jobs, people

have more money and

increase consumption.

AD = C + I + G + (X – M)

Taxes

Price

level

GDP

AD

SRAS

PE

LRAS

YN Y1

P1

AD1


- Lower taxes means

people have more

money to use for

consumption and also

businesses have more

money to increase

investment spending.

AD = C + I + G + (X – M)

or

Government spending

Taxes

***Ceteris Paribus




Contractionary

Fiscal Policy

Deflationary

Fiscal Policy

A decrease in government spending

or increase in taxes to decrease AD.

Time

Long Run

Short Run

Econ

Growth



the business cycle.

Fiscal Policy

At this point use

Contractionary Fiscal

Policy

At this point

use

Expansionary

Fiscal Policy

Time

Long Run

Short Run

Business Cycle

Econ

Growth



the business cycle.

Fiscal Policy

- Basically,

fiscal policy

aims to

stabilize

economic

growth,

avoiding a

boom and

bust economic

cycle.


Automatic

Stabilizers

Discretionary

Fiscal Policy

Two ways the policy is implemented. Either automatically without having to change policy or by the direct change by lawmakers in response to economic changes.

- based on the subjective judgment of policymakers in the moment to an attempt to directly affect the economy.

Discretionary

Fiscal Policy

在当下，政策制定者决定

Ways to accomplish it:

- New Laws or Legislation 法规


- New jobs programs / public works

- Issue new Bonds



- A set of laws or legislation 法规 that occurs and has an immediate response without any official or government body having to take action.

Discretionary

Fiscal Policy

Automatic

Stabilizers

- Progressive Taxes - Direct taxes on households income

Poor Rich Averagepay

10%

pay

15%

pay

20%

As income and AD decrease the progressive taxes with

“automatically” tax people less and visa versa.

16

Types of Taxes

Direct Taxes

-Taxes based on ownership.

-Paid directly to the government by people.

-Example:

-Income taxes, property taxes.

Indirect Taxes

-Taxes paid on a market transaction.

-Sellers usually pay to the government.

-Example:

-sales taxes, VAT taxes.




Discretionary

Fiscal Policy

Automatic

Stabilizers

- Unemployment Benefits

As income and AD increase people won’t need unemployment benefits so “automatically”

changes and visa versa.




Discretionary

Fiscal Policy

Automatic

Stabilizers

- Progressive Taxes


- New laws with permeant spending requirements

- annual expenditures and tax receipts

of the government. 支出和税收

Fiscal Policy

Fiscal Budget




Fiscal Policy

Fiscal Budget


- if expenditures exceeds tax receipts. Budget Deficit支出税收>

In the US and other countries, it’s very common for governments to have

constant deficits.



Fiscal Policy

Fiscal Budget



- if tax receipts exceeds expenditures. Budget Surplus

支出税收 >

And surpluses are very uncommon…



Fiscal Policy

Fiscal Budget




支出税收 >Balanced Budget - if tax receipts equals expenditures.

支出税收 =

Insert a Government

Balance Budget graph here

Ha Ha! I can’t find a picture for this, it almost never

happens!

Fiscal Budget


Budget Deficit vs. Budget Surplus

- The government borrows to finance a budget deficit and

repays its debt when it has a budget surplus.

政府借到预算赤字融资。政府偿还其债务时，有预算盈余。

- The amount of debt outstanding that

arises from past budget deficits is called

national debt.

旧债从过去的预算赤字总额被称为国家债务。






3.1) Budget Deficit Problems


Crowding out: - Government spending and borrowing

that may fail to increase AD and hurts

排挤 private investment.

- When the government has to borrow, it needs to borrow from the private sector. This could be private individuals, pension funds or investment trusts. It is argued that if the private sector buy government securities this will crowd out 排挤 private sector investment.

- Typically this deals with the increase of interest

rates due to attempting to sell more bonds to

finance debt.


Crowding out: - Government spending and borrowing

that may fail to increase AD and hurts

排挤 private investment.

- There is a limited supply of money that banks have to lend out.

If more investors want the money = the money becomes more valuable

= interest rates increase

But then higher interest rates will lead to investors not wanting it because now it’s more expensive.

So if governments want to borrow more of this scarce money it can increase the interest rates and hurt some private investors.


Long term debt: - Borrowed money has to be paid back

with interest over time meaning to

total costs will be higher.

- Future budgets will have less

discretionary spending ability due to

having to pay back old loans

Crowding out:

Discretionary

Fiscal Policy

Limitations:

- Political conflicts - Keynesians vs.

Monetarists, vs.

Conservatives

Automatic

Stabilizers


Remember short run ideas…

versus long run ideas…

Discretionary

Fiscal Policy

Limitations:

- Political conflicts

Automatic

Stabilizers


- By time policy is

enacted the economy

may have changed

- Time lags

Often it takes 1 or 2 years for the changes to cycle through the economy.

This policy was enacted, but unemployment got worse

before it stabilized.

Discretionary

Fiscal Policy

Limitations of both:

Automatic

Stabilizers


- Poor information

- Crowding out

- Cause deficit / debt problems

- Governments can be inefficient

- changes the

effectiveness

- Depends on the size of the multiplier

So to summarize…..



the business cycle.

Fiscal Policy

AD = C + I + G + (X – M)

- Basically, fiscal policy aims to

stabilize economic growth,

avoiding a boom and bust

economic cycle.


- An increase in government spending

or decrease in taxes to increase AD.

Expansionary

Fiscal Policy

AD = C + I + G + (X – M)

Inflationary

Fiscal Policy

or

Government spending

Taxes

***Ceteris Paribus




AD = C + I + G + (X – M)

or

Government spending

Taxes

***Ceteris Paribus




Contractionary

Fiscal Policy

Deflationary

Fiscal Policy

A decrease in government spending

or increase in taxes to decrease AD.

Time

Long Run

Short Run

Econ

Growth



the business cycle.

Fiscal Policy

Use Contractionary

Fiscal Policy

Use

Expansionary

Fiscal Policy

- based on the subjective judgment of policymakers in the moment to an attempt to directly affect the economy.

Discretionary

Fiscal Policy

在当下，政策制定者决定


- New Laws or Legislation 法规


- New jobs programs / public works

- Issue new Bonds




Discretionary

Fiscal Policy

Automatic

Stabilizers

- Progressive Taxes


- New laws with permeant spending requirements



Fiscal Policy

Fiscal Budget




支出税收 >Balanced Budget - if tax receipts equals expenditures.

支出税收 =

Discretionary

Fiscal Policy

Limitations:

- Political conflicts

Automatic

Stabilizers


- By time policy is

enacted the economy

may have changed

- Time lags

Discretionary

Fiscal Policy

Limitations of both:

Automatic

Stabilizers


- Poor information

- Crowding out

- Cause deficit / debt problems

- Governments can be inefficient

- changes the

effectiveness

- Depends on the size of the multiplier

The End – but don’t forget the multiplier

Thanks

Fiscal policy SFLS

Education

Transcript of Fiscal policy SFLS