Chapter 11 Fiscal Policy The Keynesian View and Historical Perspective fiscal policy changing taxes or government spending with the purpose of achieving macroeconomic goals conducted by Congress and the President before the Great Depression classical view was mainstream thought recovery from recessions would occur without fiscal policy and happen quickly the economy would self heal Keynes disagrees with classical economists recourse prices are sticky downward unions large corporations pessimism can get stuck in recession Keynesian equilibrium increase in consumer spending firms sell more goods firms produce more goods as long as spending is strong boom continues decrease in consumer spending firms sell fewer goods firms make fewer goods as long as spending remains weak recession continues total spending total output small changes have a BIG impact o o o o o o multiplier principle one individual s expenditures becomes the income of another small disruptions quickly become recessions indicates how much additional income will be created by 1 of additional spending o o o expenditure multiplier 1 1 MPC assumes that all workers impacted by new spending were initially unemployed when in reality more spending just leads to higher prices if resources were already in use and that the multiplier will have its biggest impact if resources were unemployed marginal propensity to consume the proportion of additional income that households choose to spend on consumption paradox of thrift the idea that when many households try to increase saving actual saving may not increase reality uncontrolled spending beyond your means isn t good more saving higher growth of GDP greater future GDP congress and the president should pursue countercyclical policy that attempts to move the economy in an opposite direction from the forces of the business cycle expansionary fiscal policy during a recession the government should cut taxes and or increase government spending this will run a budget deficit this will stimulate AD and shift it right restrictive fiscal policy during a boom the government should increase taxes and or cut government spring this will run a budget surplus this will dampen AD and shift it left policy lags political process moves slowly policy takes time to impact economy 6 12 months o o it s difficult to predict future economic conditions incorrect policy timing would create economic instability not fix it automatic stabilizers tend to lead to a budget deficit during a recession and a surplus during a boom do not require change in policy ex unemployment compensation corporate profit tax and progressive income tax All content belongs to Dr Sherron of Florida State University I do not own this material I will remove the material upon request of Florida State University
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