Fiscal policy

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 Fiscal policy

Contents

 National budget
 The multiplier
 Impacts of national budget
on the economy
 Fiscal policy
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Fiscal policy

National budget
A national budget is the budget of a country. The government
gets money from taxes and fees, and spends it on things like
national defense, infrastructure, grants for research,
education, and the arts, and social programs such as Social
Security and Medicare.
Income Spending

Budget deficit

Balanced Budget

Budget surplus

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Fiscal policy

National budget
AD = C + I + G + X - M
Yd = Y – (Ti – Tr) = Y – T
Yd = C + S
C = Co + Cm.Yd
• When G change, ΔAD = Δ G, ΔY=k. Δ AD or ΔY=k. Δ G
• When T change, Yd change = -ΔT,
ΔC = -Cm. ΔT, Δ AD = - Cm. Δ T then Δ Y=-k.Cm. Δ T
• ΔY = k. ΔG – k.Cm.ΔT = k. ΔG(1 – Cm) = k. ΔT(1-Cm)

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 Fiscal policy

The multiplier
AD k­­is the multiplier of AD
AD2
Y k = 1/(1-ADm)
E2
AD1
With ADm = Cm(1-Tm) +Im-Mm

∆AD
E1
∆Y = k.∆AD Y k­­C , k­­I , k­­G , k­­X-M , = k

k­­Tr = k*Cm
k­­C , k­­I , k­­G , k­­X-M , k­­Tx, k­­Tr , k­­T is the multiplier of C,
k­­Tx = k­­T = - k­­Tr
I, G, (X-M), Tx, Tx, T
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Fiscal policy

Impacts of national budget on the economy

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Fiscal policy
Fiscal policy
Definition
Fiscal policy describes changes to government
spending and revenue behavior in an effort to
influence the economy. By adjusting its level
of spending and tax revenue, the government
can affect economic outcomes by either
increasing or decreasing economic activity

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Fiscal policy

Fiscal policy
Types

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Fiscal policy
Fiscal policy
Types:
Expansionary fiscal policy

Y1 < Yp: Recression  ↑ Yo

AD↑ => G ↑ & T↓
(T ↓ Yd ↑ C ↑)

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Fiscal policy
Fiscal policy
Types:
Contractionary fiscal policy

Y2 > Yp: Expansion ↓Yo

AD↓ => G ↓ & T↑

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Fiscal policy

Fiscal policy
Tools:
Adjust T, G to gain Yp
Change G only: ∆G = ∆AD

Change T only: ∆T = - ∆Yd = - ∆C/Cm = -∆AD/Cm

Change both G & T:

∆G = ∆AD1
∆T = -∆AD2/Cm  ∆AD2 = -∆T*Cm
∆AD = ∆AD1 + ∆AD2 = ∆G - ∆T*Cm

Or: ∆G - Cm *∆T = ∆AD

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Fiscal policy

Fiscal policy
Tools:
Adjust T, G with unchanged AD

∆G = ∆AD
∆C = Cm*∆Yd= -Cm ∆T

While ∆C = -∆G
-Cm ∆T = -∆G

∆T= ∆G/Cm

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Fiscal policy

Fiscal policy
Automatic stablizers
• Automatic stabilizers are features of the tax and transfer systems
that temper the economy when it overheats and stimulate the
economy when it slumps, without direct intervention by
policymakers.
• Automatic stabilizers offset fluctuations in economic activity
without direct intervention by policymakers. When incomes are
high, tax liabilities rise and eligibility for government benefits falls,
without any change in the tax code or other legislation. Conversely,
when incomes slip, tax liabilities drop and more families become
eligible for government transfer programs, such as food stamps and
unemployment insurance, that help buttress their income.

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