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chap balanced budget


									Eco 200 – Principles of

      Chapter 12:Fiscal Policy
Fiscal Policy – Keynesian
Fiscal policy – intermediate
Fiscal policy – classical region
   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
   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
   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
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
   Loanable funds model
Demand for loans
Supply of loans
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
   Value-added taxes are commonly used
    in most other developed economies

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