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 (1) Change money supply (2) Effect interest rates

2. Monetary policy

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 (1) fiscal policy -- ↓ G or T (2) monetary policy --↓ money supply, interest rate

2. Contractionary -- if want to contract economy

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 fullemployment, a stable price level, and economic growth.

VI. Macroeconomic Policy Maker Advisory Groups

1. Fiscal Policy within AS-AD Model If Recession.Joint Economic Committee (JEC) 1. President's Council of Economic Advisers (CEA) 2.Decrease "G" or increase "T" VIII. Congresses' .Increase "G" or decrease "T" 2. Congressional Budget Office VII. Expansionary . Use Expansionary FP If Inflation Use Contractionary Fiscal Policy . Fiscal Policy Can be: 1. Contractionary .

Operational lag . Administrative lag . Crowding out effect 6. Supply side view .Takes time to recognize that a problem exists. 2. 3. goals other than economic 2. a political business cycle 5. Political problems 1.Takes time to get government fiscal machinery working. Problems with Discretionary Fiscal Policy 1.Takes time for fiscal policy to take effect. expansionary bias 3. Recognition lag .total effect is 1/1-mpc 2) Decrease T .impact is less because of saving X. Inpact of G is greater than T 1) Increased G .IX. 4.

Corporate profits tax. 4.X. 2. Unemployment compensation. 1. 3. Progressive income tax. Fiscal Policy in Open Economy 1) Shocks from abroad 2) Net Export Effect . regulations. They do not require any new laws. Transfer payments. XI. Nondiscretionary Fiscal Policy (Built-in automatic stabilizers) These are in-place laws that affect government spending and taxing. rules. Automatic Stabilizers and Government Surpluses and Deficits XII. or action by anyone.

low taxes. If have unemployment (or recession) : 3. (2) encourage output 4. so does tax rate. and low government spending 2.as base increases. Progressive . Example: Progressive income tax with income as the base. Tax Types (by Rate-Base Structure) 1. Favor limited government. Supply-side Economics & AD-AS Note: At GDP1 have unemployment (or a recessionary level of GDP). XIII.Supply-Side Economics and Fiscal Policy 1. If have inflation (1) lower taxes. . (2) promote business expansion (1) lower government spending.

. Example: Sales tax with purchases as the base. Regressive -.as base increases. Proportional -.as base increases.2. tax rate decreases. Example: Sales tax with income as the base. 3. tax rate remains the same.

Money supply changes 9. Changes in raw materials prices 8. Contract orders for new plant and equipment 10. Leading Economic Indicators 1. Stock market price 5.Many others . Changes in unfilled orders for durable goods 7. Initial unemployment claims 4. Index of consumer confidence 2.XIV. Average work-week 3. Housing building permits 6.