Fiscal Policy: End Show

12
Legislative Mandate
Fiscal Policy and the A
D-AS Model
CHAPTER
Expansionary and Cont
ractionary Fiscal Policy
Financing of Deficits an
d Disposing of Surpluse
s
Built-In Stability
FISCAL
Evaluating Fiscal Policy
Fiscal Policy in the Ope
n Economy
Supply-Side Fiscal Polic
POLICY
y
Forecasting the Future
Key Terms
Previous Next
Slide Slide
End
Show
12 - 1
Copyright McGraw-Hill/Irwin, 2002
LEGISLATIVE MANDATES
Legislative Mandate
D-AS Model
Employment Act of 1946
s
Built-In Stability
Council of Economic
n Economy
Advisors (CEA)
Joint Economic
y
Key Terms
Committee (JEC)
Previous Next
Slide Slide
End
Show
12 - 2
FISCAL POLICY AND THE AD-AS MODEL
Legislative Mandate
Two Options
D-AS Model
• Discretionary Fiscal Policy
s
• Non-Discretionary Fiscal
Policy
Built-In Stability
Expansionary Fiscal Policy

n Economy
y
Forecasting the Future • Increase Government
Key Terms
Spending
Previous
Slide
Next
Slide
• Tax Reductions
End
Show
• Combinations of the Two
12 - 3
EXPANSIONARY FISCAL POLICY
Legislative Mandate the multiplier at work...
D-AS Model
$5 billion initial
increase in spending
s
Full $20 billion
Price level
Built-In Stability
Evaluating Fiscal Policy increase in
n Economy aggregate
y
demand
Key Terms
P1
AD2 AD1
Previous Next
Slide Slide $485 $505
End
Show Real GDP (billions)
12 - 4
CONTRACTIONARY FISCAL POLICY
Legislative Mandate the multiplier at work...
D-AS Model
P4
s $5 billion initial
decrease in
Price level
Built-In Stability
spending
n Economy P3
Full $20 billion
y
decrease in AD4
Key Terms
aggregate AD3
demand
Previous Next
Slide Slide $515
End
12 - 5
FINANCING OF DEFICITS AND
Legislative Mandate DISPOSING OF SURPLUSES
D-AS Model
•Borrowing vs. New Money
s •Borrowing From The Public
•Money Creation
Built-In Stability
n Economy
y
•Debt Retirement vs. Idle Surplus
Key Terms
•Debt Reduction
•Impounding
Previous
Slide
Next
Slide
Which Policy Option?
End
Show
12 - 6
G or T?
BUILT-IN STABILITY
Legislative Mandate
D-AS Model
Net tax revenues vary directly
with GDP
s
Built-In Stability
Transfer payments behave the
n Economy
opposite way as tax
y
Forecasting the Future collections
Automatic or Built-In
Key Terms
Previous Next
Stabilizers
Economic Importance
Slide Slide
End
Show
12 - 7
BUILT-IN STABILITY
Legislative Mandate
D-AS Model
T
Financing of Deficits an Government Expenditures,
s G, and Tax Revenues, T
Built-In Stability
Surplus
n Economy
G
y
Deficit
Key Terms
Previous Next
Slide Slide GDP1 GDP2 GDP3
End
Show
Real Domestic Output, GDP
12 - 8
BUILT-IN STABILITY
Legislative Mandate
D-AS Model
Tax Progressivity
• Progressive Tax System
• Proportional Tax System

s
Built-In Stability
n Economy • Regressive Tax System
y
Key Terms
The more progressive the
tax system, the greater the
Previous Next
Slide
End
Slide
economy’s built-in stability
Show
12 - 9
EVALUATING FISCAL POLICY
Legislative Mandate
D-AS Model
Full-Employment Budget
ractionary Fiscal Policy Cyclical Deficit
s
Built-In Stability
Recent U.S. Deficits & Surpluses
Actual Full-Employment
n Economy Deficit or Deficit or
Supply-Side Fiscal Polic Year Surplus Surplus
y 1990 -3.9% -2.1%
Forecasting the Future 1991 -4.5 -2.6
Key Terms 1992 -4.7 -3.0
1993 -3.9 -2.6
1994 -2.9 -2.0
1995 -2.2 -1.9
1996 -1.4 -1.2
Previous Next
Slide Slide 1997 -0.3 -0.9
1998 +0.8 -0.4
End 1999 +1.4 +0.3
Show
2000 +2.4 +1.1
12 - 10
FULL-EMPLOYMENT DEFICITS
Legislative Mandate
D-AS Model
Expansionary and Cont No Change in T1
G, and Tax Revenues, T (billions)

Financing of Deficits an Fiscal Policy
Government Expenditures,
s
Built-In Stability
n Economy b a
$500 G
Supply-Side Fiscal Polic 475
y
450 c
425
Key Terms
Previous Next
Slide Slide GDP2 GDP1
End
Year 2 Year 1
Show Real Domestic Output, GDP
12 - 11
FULL-EMPLOYMENT DEFICITS
Legislative Mandate
Discretionary
D-AS Model
T1
Expansionary and Cont Fiscal Policy T2
G, and Tax Revenues, T (billions)
Tax Decrease
Government Expenditures,
s
Built-In Stability
n Economy e d
$500 G
Supply-Side Fiscal Polic 475
y
450 f h
425
Key Terms
g
Previous Next
Slide Slide GDP4 GDP3
End
Year 4 Year 3
Show Real Domestic Output, GDP
12 - 12
GLOBAL PERSPECTIVE
Legislative Mandate
BUDGET DEFICITS OR SURPLUSES
D-AS Model
AS A PERCENTAGE OF GDP, 1999
ractionary Fiscal Policy -8 -6 -4 -2 0 2 4
s
Denmark
Built-In Stability Canada
Evaluating Fiscal Policy Sweden
n Economy United Kingdom
y United States
Forecasting the Future Germany
Key Terms
Italy
France
Previous Next
Czech Republic
Slide Slide Hungary
End Japan
Show
12 - 13 Source: Organization for Economic Development and Cooperation
PROBLEMS, CRITICISMS,
Legislative Mandate AND COMPLICATIONS
•Problems of Timing
D-AS Model
s
• Recognition Lag
Built-In Stability
• Administrative Lag
n Economy • Operational Lag
y
•A Political Business Cycle?
Key Terms
• Offsetting State & Local
Finance
Previous Next
Slide Slide •Crowding-Out Effect
End
Show
12 - 14
FISCAL POLICY, AGGREGATE
Legislative Mandate SUPPLY AND INFLATION
D-AS Model AS
s
Built-In Stability
Price level
Fiscal Policy:
Pure & Simple
n Economy
y
Key Terms
P1
AD1
AD2
Previous Next
Slide Slide $495 $515
End
12 - 15
D-AS Model AS
AD1 Fiscal Policy
and the
s
Built-In Stability
Price level
Crowding-Out
Effect or the
n Economy
y
Forecasting the Future Net Export
Key Terms
P1 Effect
AD2
Previous Next
AD’2
Slide Slide $495$505$515
End
12 - 16
D-AS Model AS
s
Built-In Stability
Price level
Fiscal Policy
And Inflation
n Economy
y
Key Terms
P1
AD1
AD2
Previous Next
Slide Slide $495 $505 $515
End
12 - 17
FISCAL POLICY IN THE
Legislative Mandate OPEN ECONOMY
D-AS Model
s
Shocks Originating from Abroad
Built-In Stability
Net Export Effect

n Economy
y
Key Terms
Previous Next
Slide Slide
End
Show
12 - 18
SUPPLY-SIDE FISCAL POLICY
Emphasis on Expansionary
Legislative Mandate
D-AS Model
Tax Cuts
s
Built-In Stability
Impact upon...
n Economy
• Saving and Investment

y
Key Terms
• Work Incentives
Previous Next
Slide
End
Slide
• Risk Taking
Show
12 - 19
SUPPLY-SIDE FISCAL POLICY
AS1
Legislative Mandate AS2
D-AS Model
Price level
s
Built-In Stability
Fiscal Policy in the Ope P2
n Economy
P3
y P1
Key Terms
AD2
AD1
Previous Next
Slide Slide 0 Q1 Q 2 Q3
End
Show
Real domestic output, GDP
12 - 20
Legislative Mandate
D-AS Model
The Leading Indicators
Expansionary and Cont • Average Workweek
• Initial Claims for Unemployment
s
Built-In Stability
Insurance
Evaluating Fiscal Policy • New Orders for Consumer Goods
• Vendor Performance
n Economy
y • New Orders for Capital Goods
Key Terms • Building Permits for Houses
• Stock Prices
Previous Next
• Money Supply
Slide Slide • Interest-Rate Spread
End
Show • Consumer Expectations
12 - 21
Legislative Mandate
D-AS Model
The Leading Indicators
Expansionary and Cont • Average Workweek
• Initial Claims for Unemployment
s
Insurance
Chapter
Built-In Stability
Evaluating Fiscal Policy • New Orders for Consumer Goods
• Vendor Performance
Conclusions
n Economy
y • New Orders for Capital Goods
Key Terms • Building Permits for Houses
• Stock Prices
Previous Next
• Money Supply
Slide Slide • Interest-Rate Spread
End
Show • Consumer Expectations
12 - 22
fiscal policy progressive tax system
Employment Act of 1946 proportional tax system
Council of Economic regressive tax system
Advisers (CEA) full-employment budget
expansionary fiscal policy cyclical deficit
budget deficit political business cycle
contractionary fiscal policy crowding-out effect
budget surplus net export effect
built-in stabilizer supply-side fiscal policy
Copyright McGraw-Hill/Irwin, 2002 BACK END
Legislative Mandate
Chapter 13
D-AS Model
Money
s
Built-In Stability
and
n Economy
y
Key Terms
Previous
Slide
End
Next
Slide
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12

Expansionary Fiscal Policy

• Proportional Tax System

G, and Tax Revenues, T (billions)

Net Export Effect

• Saving and Investment

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