Fiscal PolicyFiscal PolicyFiscal PolicyElias YannopoulosOctober 3, 2012Elias Yannopoulos Fiscal PolicyFiscal PolicyDeficit and DebtsThe government budget can be in three possible statesDeficit - When government outlays exceed revenueSurplus - When government revenue exceed outlaysBalanced Budget - government outlays and revenue are equalThe National debt is the accumulation of budget deficitsDebt is a stock, and deficit is a flowElias Yannopoulos Fiscal PolicyFiscal PolicyKeynesian Fiscal PolicyFocus on ADThink about AS/AD economy in a recessionWhat happens if the government does nothing?SRAS will slowly adjust as input prices fallIf the government can increase aggregate demand then thatremoves the need for SRAS and input prices to fallHow does the government go about doing this?Remember the parts of GDP/AD, consumption, investment,government, and net exportsElias Yannopoulos Fiscal PolicyFiscal PolicyAggregate Demand PolicyThe government has control over two things that affect ADGovernment spendingTaxesIn a recession the government needs to increase aggregatedemand and they do this by engaging in expansionary fiscalpolicyExpansionary policy involves either cutting taxes, increasingspending or bothLowering taxes increase people’s income causing them toconsume more, C ↑Increasing goverment spending increases AD directly, butadditionally that spending becomes income which boostsconsumption, C ↑ G ↑Elias Yannopoulos Fiscal PolicyFiscal PolicyAD Policy Cont.In a economic expansion the government needs to reduce ADto move towards long run equilibrium and so they usecontractionary fiscal policyContractionary policy involves either increasing taxes,reducing spending, or bothIncreasing taxes reduces people’s income causing them toconsume less, C ↓Reducing government spending decreases AD directly, butadditionally people who would have received income from thatspending now consume less, C ↓ G ↓Keynesian fiscal policy implies a specific government budgetplanIn a recession, run a budget deficit, and in an expansion, run abudget surplusElias Yannopoulos Fiscal
View Full Document
Unlocking...