1102 Lecture Notes Gina Pieters Topic 9 Fiscal Policy What is Fiscal Policy Ch 21 Decrease in AD Recession and Unemployment Revisited Fiscal Policy We will consider the following kinds of Fiscal Policy 1 2 Expansionary Fiscal Policy Contractionary Fiscal Policy Suppose the government collects 10 in taxes and spends 10 in government purchases in the original AD AS equilibrium Then for some reason there is a decrease in AD GDP Gap GDP Gap equation 1 Page 1102 Lecture Notes Gina Pieters Fiscal Policy Examples Ch 21 Goal Increase RGDP by 20 1 Suppose the gov t changes government spending 2 Change in Net Taxes Net Transfers Transfers Taxes Costs and Benefits of Fiscal Policy Ch 21 Ch 23 Not in Book Automatic Stabilizer Suppose RGDP falls from 40 000 pc to 38 000 pc while tax rates remain constant at 10 2 Page 1102 Lecture Notes Timing Problems Both Fiscal and Monetary Policy 1 2 3 Future Policy Reversals Balanced Budget Problems 3 Page Gina Pieters 1102 Lecture Notes Gina Pieters Policy Better to increase G or reduce T Fight recession with spending hikes or tax cuts The USA National Debt 2011 Should the government balance its budget Pro 1 2 Con 1 2 3 4 Page 1102 Lecture Notes Gina Pieters 4 Should the tax laws be reformed to encourage saving Pro 1 Con 1 2 Laffer Curve Not in Book Sps that wages are 10 per hour Income Tax Rate Reported Hours Worked 0 40 25 30 50 20 75 10 100 0 5 Page Worker Income 400 300 200 100 0 Tax Revenue per week
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