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Text: Mcconnell and Brue, 15Th Ed.: Econ/Agec 202 Chapter 12 Notes Fiscal Policy

The document outlines notes on fiscal policy from an economics textbook. It discusses the use of fiscal policy tools like government spending and taxes to achieve goals of full employment, price stability, and economic growth. Fiscal policy can be expansionary by increasing spending or decreasing taxes, or contractionary by decreasing spending or increasing taxes. It also discusses discretionary versus automatic stabilizers, problems with discretionary policy, and different types of taxes.

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154 views

Text: Mcconnell and Brue, 15Th Ed.: Econ/Agec 202 Chapter 12 Notes Fiscal Policy

The document outlines notes on fiscal policy from an economics textbook. It discusses the use of fiscal policy tools like government spending and taxes to achieve goals of full employment, price stability, and economic growth. Fiscal policy can be expansionary by increasing spending or decreasing taxes, or contractionary by decreasing spending or increasing taxes. It also discusses discretionary versus automatic stabilizers, problems with discretionary policy, and different types of taxes.

Uploaded by

chubaboo
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Econ/AgEc 202

Chapter 12 Notes
Fiscal Policy

Text: McConnell and Brue, 15th Ed.

I.  Stabilization Policies

1. Management of aggregate supply and aggregate demand to attain policy goals


(1)  full employment
(2)  stable price level
(3)  economic growth

II.  Two Types of Stabilization Policy

1. Fiscal policy tools
(1)  Change government spending
(2)  Change taxes
2. Monetary policy
(1)  Change money supply
(2)  Effect interest rates

III.  Stabilization Policy can be Expansionary or Contractionary

1. Expansionary - if want to expand economy 


(1)  fiscal policy -- G or T
(2)  monetary policy -- money supply, interest rate
2. Contractionary -- if want to contract economy
(1)  fiscal policy --  G or  T
(2)  monetary policy --money supply,   interest rate

IV. Fiscal Policy

Spending and taxing by government.

1. Types of fiscal policy 


(1)  Discretionary - Government can set amount of spending and taxing at its
discretion. 
(2)  Nondiscretionary - Mechanisms are in place that automatically change
government spending and
      taxing.  Automatic stabilizers.
V. Employment Act of 1946

For the first time, the Federal government assumed responsibility for creating full-
employment, a stable price level, and economic growth.

VI. Macroeconomic Policy Maker Advisory Groups

1. President's Council of Economic Advisers (CEA)


2. Congresses' - Joint Economic Committee (JEC)
1. Congressional Budget Office

VII. Fiscal Policy

Can be:

1. Expansionary - Increase "G" or decrease "T"


2. Contractionary - Decrease "G" or increase "T"

VIII. Fiscal Policy within AS-AD Model

    If Recession, Use Expansionary FP

If Inflation Use Contractionary Fiscal Policy
IX. Inpact of G is greater than T

1) Increased G - total effect is 1/1-mpc

2) Decrease T - impact is less because of saving

X. Problems with Discretionary Fiscal Policy

1. Recognition lag - Takes time to recognize that a problem exists.


2. Administrative lag - Takes time to get government fiscal machinery working.
3. Operational lag - Takes time for fiscal policy to take effect.
4. Political problems
1. goals other than economic
2. expansionary bias
3. a political business cycle
5. Crowding out effect
6. Supply side view
X. Nondiscretionary Fiscal Policy

(Built-in automatic stabilizers)

These are in-place laws that affect government spending and taxing.  They do not
require any new laws, rules, regulations, or action by anyone.

1. Unemployment compensation.
2. Corporate profits tax.
3. Progressive income tax.
4. Transfer payments.

XI. Automatic Stabilizers and Government Surpluses and Deficits

XII.  Fiscal Policy in Open Economy

1) Shocks from abroad

2) Net Export Effect


Supply-Side Economics and Fiscal Policy 

1. Favor limited government, low taxes, and low government spending


2. If have unemployment (or recession) :
(1)  lower taxes, (2) promote business expansion
3. If have inflation
(1)  lower government spending, (2) encourage output
4. Supply-side Economics & AD-AS

Note:  At GDP1 have unemployment (or a recessionary level of GDP).

XIII.  Tax Types (by Rate-Base Structure)

1. Progressive - as base increases, so does tax rate.


Example:  Progressive income tax with income as the base.
 

2.  Proportional -- as base increases, tax rate remains the same.


Example:  Sales tax with purchases as the base.

3.  Regressive -- as base increases, tax rate decreases.


     Example:  Sales tax with income as the base.
 

XIV.  Leading Economic Indicators 

1. Index of consumer confidence


2. Average work-week
3. Initial unemployment claims
4. Stock market price
5. Housing building permits
6. Changes in unfilled orders for durable goods
7. Changes in raw materials prices
8. Money supply changes
9. Contract orders for new plant and equipment
10.Many others

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