VIEWS: 0 PAGES: 19 POSTED ON: 10/7/2012
Eco 200 – Principles of Macroeconomics Chapter 12:Fiscal Policy Fiscal Policy – Keynesian region Fiscal policy – intermediate region Fiscal policy – classical region Multipliers Government spending multiplier = 1 / (MPS + MPI) Lump-sum tax multiplier = -(MPC-MPI) / (MPS + MPI) Balanced-budget multiplier = effect of equal changes in G and T = 1 Government budget constraint Government spending = taxes + change in government debt + change in government-issued money Tax finance of government spending Balanced-budget multiplier = 1 Offsetting effects: Incentive effects may reduce labor supply and cause a reduction in AS Laffer curve Deficit financing of government spending Ricardian equivalence: Individuals may save more in response to higher expected future taxes Crowding out: Increased borrowing leads to higher interest rates; resulting in a reduction in I and C (discussed more extensively shortly) Monetary expansion used to finance government spending Due to autonomy of Fed, this is less likely to occur in the U.S. today. If used, tends to be inflationary, resulting in a reduction in C. Discretionary fiscal policy vs. automatic stabilizers Discretionary fiscal policy: changes in government spending, taxes, and/or transfer payments to achieve a macroeconomic policy goal Automatic stabilizers: automatic increase in transfers and tax reductions as income falls (the reverse holds when income rises) Examples: unemployment compensation, income tax, welfare programs. Automatic stabilizers reduce the value of the multiplier. Tax structures Proportional tax: Tax / income is constant as income rises Progressive tax: Tax / income rises as income rises Regressive tax: Tax / income declines as income rises Deficits and debt Deficit = G – T = amount by which government spending exceeds net taxes Debt = total stock of outstanding government bonds Deficit = a flow variable Debt = a stock variable Deficits, interest rates, and investment Loanable funds model Demand for loans Supply of loans Equilibrium Increase in deficit Costs of deficit Crowding out: higher interest rates result in less investment Higher deficit results in currency appreciation and a decline in net exports (X) Interest payments – redistribution of income Regressive? Foreign debt holdings Foreign fiscal policy Share of GDP devoted to G is smaller in the U.S. than in most developed economies Value-added taxes are commonly used in most other developed economies
"chap balanced budget"