DOC PREVIEW
UNC-Chapel Hill ECON 101 - Chapter 35 word

This preview shows page 1-2 out of 6 pages.

Save
View full document
View full document
Premium Document
Do you want full access? Go Premium and unlock all 6 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 6 pages.
Access to all documents
Download any document
Ad free experience
Premium Document
Do you want full access? Go Premium and unlock all 6 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

Lecture Outline - Fiscal PolicyA. Introduction1. What is fiscal policy?a. Federal government policy on taxes, spending, and bor-rowing that is designed to influence business fluctuations2. Name two things the government could do if it wants to implement ex-pansionary fiscal policy. How will these policies affect AD?a. Government could spend more money (AD would shift right)b. Cut taxesc. Goal: increase spendingd. If there is a shock to consumer spending, this is a de-crease in velocity. AD shifts to the left. Because wages are sticky, the decline in velocity is split between lower real growth and lower inflation. The economy can go into a recession3. Name two things the government could do if it wants to implement contractionary fiscal policy. How will these policies affect AD?a. Increase Taxes, spend less4. Explain how an increase in government spending creates a multiplier effect.a. The multiplier effect: the additional increase in AD causedwhen expansionary fiscal policy increases income and thus con-sumer spending. The greater the multiplier effect the greater willbe the effect of an increase of government spending on ADb. The multiplier depends on how consumers respond do in-creases in incomec. Marginal Propensity of Consume (MPC): the fraction of ex-tra income that households consume rather than saved. Change in GDP growth = 1/(1-MPC) x change in govern-ment spendinge. The multiplier = 1/(1-MPC)B. The Limits to Fiscal Policy1. List and briefly describe the 4 limits to fiscal policy.1a. Crowding out: increase in AD is reduced or neutralized if government spending reduces private spendingb. A drop in the bucket: the economy is so large than gov-ernment can rarely increase spending enough to have a large impact.c. A matter of timing: it can be difficult to time fiscal policy so that the AD curve shifts at just the right momentsd. Real Shocks: shifting AD doesn’t help much to combat realshocks.2. When is it best to use fiscal policy? When there is a real shock or an AD shock?C. Crowding Out1. What is private spending? What is public spending?2. What is crowding out?a. The decrease in private spending that occurs when the government increases spendingb. Fiscal policy will be most effective when people are afraidto spend their money ( this eliminates crowding out)3. Name two ways that the government can finance its spending?a. Raise taxes. Higher taxes reduce private spendingb. Sell more bonds to finance fiscal policy4. Suppose the government raises taxes by $300 million in order to pay for new spending. How will the new government spending initially af-fect the AD curve if:a. Households were initially consuming 90% of every dollar earned?b. Households were initially consuming 50% of every dollar earned?c. Households were initially consuming 10% of every dollar earned?Under which scenario will the government’s spending have the biggest effect on the economy?5. Suppose the government sells $300 billion worth of bonds in order to pay for new spending.a. What happens to interest rates when the government sells bonds? Use the loanable funds market to support your answer.21. Supply f bonds increases, bond prices fall and interest rates rise. Higher interest rates= less private spending.2. Bond-financed fiscal policy will be most effectivewhen the private sector is relucting to invest or saveb. How does the change in the interest rate affect investment? Con-sumption? Explain.c. When is it best to use bond-financed expansionary fiscal policy?6. Suppose the economy is in a recession and the government decides to cut taxes by $300 billion. If the government does not change its spending this rebate will lead to more government borrowing in the fu-ture. If people are forward-looking, explain why the tax cut will lead to less consumption in the economy (i.e. explain Ricardian equivalence).a. Ricardian Equivalence occurs when people see that lower taxes today mean higher taxes later. They save their tax cut to pay future taxesb. To the extent that RE occurs, bond-financed tax cuts are less effective in the short-run.7. Suppose the economy is in a recession and the government decides to give households a tax rebate worth $300 billion. If the government does not change its spending this rebate will lead to more government borrowing in the future. If people are forward-looking, explain why they will not spend the tax rebate.a. Tax Rebate: taxpayers are handed a checkb. A permanent tax rebate is more likely to be spend than a temporary rebate. Changes in consumption are largely based on changes in permanent incomec. Under what conditions will the tax rebate restore the economy to itsnatural rate of growth?d. Under what conditions will the tax rebate have a limited effect on the economy?D. A Matter of Timing1. Name and briefly describe the 5 relevant lags of implementing fiscal policy.3a. A drop in the Bucket: normally the changes in fiscal policy as percentage of GDP are smallb. Fiscal olicy is intended to correct short-term problemsc. Recognition lags: problems must be recognizedd. Legilative: congress must propose and pass a plane. Implementation: bureaucracies must implement the planf. Effectiveness: the plan takes time to workg. Evaluation and adjustment: Did the plan work? Have con-ditions changed?2. Which type of policy – monetary or fiscal – can be implemented more quickly? Why?a. Monetary lags are shorter than fiscal policy lags. The Fed can act very quicklyb. 3. Which type of policy – monetary or fiscal – has a shorter effectiveness lag? Why?a. Advantage of fiscal policy over monetary policy is that theeffectiveness lag is shorter. Monetary policy depends on willing-ness of banks to lend and businesses to borrow4. What is an automatic stabilizer? Give some examples.a. Changes in fiscal policy that stimulate AD in a recession without explicit action by policy makers1. Welfare and transfer programs. Increase income, con-sumption and therefore AD2. Consumption smoothing: People draw on savings during an economic downturn. Credit cards can help consump-tion smoothing5. What is the difference between an automatic stabilizer and discre-tionary fiscal policy?E. Government Spending versus Tax Cuts as Expansionary Fiscal Policy1. What are the political differences between the two types of fiscal policy(e.g. tax cuts or increased government spending)?4a. Tax cut: puts more money into the private secro, Bush (Republican) favored the tax cutsb. SPending: grows


View Full Document

UNC-Chapel Hill ECON 101 - Chapter 35 word

Download Chapter 35 word
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Chapter 35 word and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Chapter 35 word 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?