Slide 1USA Today October 2, 2013How much does this cost?Slide 4How come $1.6 billion per week?How come $1.6 billion per week?How come $1.6 billion per week?QuestionMPCQuestionQuestionQuestionQuestionSlide 14Long Run effect of Fiscal PolicyFiscal Policy or not?Sources of Tax Revenue in the U.S., 2007Government Spending in the U.S., 2007Slide 19Slide 20Slide 21ConsequencesSlide 23Government Debt/ Public DebtProblems associated with large government debtDebt since 1900 (nominal)Debt as % of GDPSlide 28US vs. JapanLimits to Fiscal PolicyAmerican recovery reinvestment act US 2009Ch 13. Fiscal PolicyDr. Grace OEcon 2105Principle of MacroeconomicsUSA Today October 2, 2013The federal government is in Day 2 of its first shutdown since 1996. An estimated 800,000 federal employees have been furloughed, the lights are turned off in many government offices, and clinical drug trials and disease-prevention work have been hampered. http://www.usatoday.com/story/news/politics/2013/10/02/government-shutdown-five-things-wednesday/2904929/How much does this cost?President Obama warned a government shutdown will harm the economy, and could have grim consequences depending on how long it will last. IHS Global Insight, a market research firm, estimated the shutdown could cost $1.6 billion a week in lost economic output. NBC News reported that would translate to about $300 million a day or $12.5 million an hour.How much?How much?How come $1.6 billion per week?800,000 furloughed.IF their wage is $15 per hour$15 ×40 = $600 per person per week$600 × 80,000 = $48,000,000How come $1.6 billion per week?Not only 800,000 people did not get their income, but also Government Expenditure decreased, such as National ParkStill, $48 million + some millions from national park < $1.6 billionHow come $1.6 billion per week?What if a family going out LESS for dinner?What if a family buying LESS?What if a vendor did not get the money from US government due to shutdown?QuestionIf your disposable income (Y - T) goes up by $1,000, how much would you spend out of it?MPCMPC: Marginal Propensity to ConsumeWhen disposable income goes up by $1, how much consumption goes up.QuestionIf government spends additional $1000, How much output can increase in total in the economy, if MPC is 0.6?QuestionIf government spends additional $1000, How much output can increase in total in the economy, if MPC is 0.6?1000,1000 × 0.6 = 600600 × 0.6 = 360360 × 0.6 = 216…1000 + 600 + 360 + 216 +… = 1000 x (1/1-0.6) = 1000 x 2.5 = 2,500.Spending MultiplierSpending MultiplierQuestionIf MPC = 0.75, what is spending multiplier?Spending multiplier = 1/1-0.75 = 4If government spends $1,000 less, how much total output would change?-$1,000 x 4 = $4,000QuestionActual output is $14 trillion and Potential output is $15 trillion. MPC is 0.5How much government should spend to close an output gap?Output gap = $15 trillion - $14 trillion=$1 trillSpending multiplier = 1/(1-0.5) = 2$1 trillion = G x 2G = $0.5 trillionY1PE32SRAS2LRASAD1Real GDPAggregate price levelPotentialoutputE1P1SRAS1AD2Y2E3PLong Run effect of Fiscal Policy2Fiscal Policy or not?Active vs. Passive?Rule vs. Discretionary?Government spending vs. Tax cut?Sources of Tax Revenue in the U.S., 2007Government Spending in the U.S., 2007Social insurance programs are government programs intended to protect families against economic hardship.Government Spending and Tax Revenue for Some High-Income Countries in 2006http://www.boell.org/downloads/Dewan__Eittingler_Comparing_Public_Spending.pdfBudget Balance = T – G(T = Tax – Transfer payment)(G = Government expenditure)ConsequencesIf expansionary fiscal policy is paid for by borrowing…Ideal: stimulate AD in recession, and pay off debt in expansionWith the government operating like this…Increase spending a lot in recession,Increase spending in expansion,Result: Rising DEBTGovernment Debt/ Public DebtTime TrendDebt to GDP ratioTreasuryDirect.orgOwnership of public debtCross country comparisonProblems associated with large government debtInterest rate paymentSlow economic growthEconomic CollapseFor the details, Watch a video, Fiscal Policy_US_effectivenssGo to D2L, Content,  Video, Chapter 13.Debt since 1900 (nominal)Debt as % of GDPUS vs. JapanLimits to Fiscal Policy1. Crowding out2. A drop in the bucket3. A matter of timing4. Real ShocksFor the details, Watch a video, Fiscal Policy_US_effectivenssGo to D2L, Content,  Video, Chapter 13.American recovery reinvestment actUS 2009Cash for clunkersFederal Budget CategoriesState and Local grants and borrowingFor the details, Watch a video, Fiscal Policy_US_effectivenssGo to D2L, Content,  Video, Chapter