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12.1fiscal policy
The goal of stabilization is to keep the economy as close as possible to
its
.
Stabilization policy is government policy designed to lessen the effects of the
business cycle which can be either expansionary policies or contractionary policies.
Expansionary policies attempt to
unemployment and
total output (Contains expansionary fiscal policy and expansionary momentary policy.
contractionary policies attempt to
prices and bring the economy
to its potential output. (Contains contractionary fiscal policy and
contractionary momentary policy.)
Fiscal Policy uses
and
as its tools.
Fiscal Year is the 12-month period to which a budget applies
Monetary policy uses interest rates and the money supply as its tool. (Not included in
this chapter, but will be involved in later chapters)
The government makes changes on government purchases and tax rates to influence
the aggregate demand
Government
Purchases(Immediate
effect on aggregate
demand )
Tax rate(less
immediate effect on
aggregate demand)
Effect on Aggregate
demand
Expansionary fiscal policy
Contractionary fiscal policy
Increase
Decrease
Cut Tax
Increase Tax
Increase aggregate demand,
shifting the aggregate demand
curve to right. Push up the
equilibrium price level and
output.(p282)
Reduce aggregate demand,
thereby shifting the aggregate
demand curve to the left.
Equilibrium price level and
output are pushed down(p283)
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Discretionary Policy is international government intervention in the economy such as
budgeted changes in spending or taxation.
Automatic stabilizers: built-in measures, such as taxation& transfer payment
programs, which affect aggregate demand and minimize the impact of inflationary
and recessionary gaps.
Net tax revenues = taxes collected — transfers subsidies
12.2The Spending Multiplier
The multiplier effect:
The multiplier effect:
demand
.
the magnified impact of a spending
change on aggregate
The marginal propensity to consumer (MPC): the effect on domestic consumption of a
change in income.
MPC = change in consumption on domestic items
Change in income
The marginal propensity to withdraw: the effect on withdrawals (i.e. saving
import
, and taxes
) of a change in income.
,
MPW = change in total withdrawals
Change in income
MPC + MPW =111 because income is either spen
on domestic
consumption or withdraw
from the circular flow as saving, import, and
taxes.
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*Exercise: A $100 increase in a person's income causes him to increase his saving
by $5, his imports by $35, and his tax payments by $20. In this case, the marginal
propensity to withdraw is:
The spending Multiplier
Spending Multiplier: the value by which an initial __________ _____________ is
multiplied to give the ___________ _____________ in real output.
 Total change in output = initial change x spending
(Shift in AD curve) in spending multiplier

The spending multiplier is the ________________ of the marginal propensity
to withdraw
 Spending Multiplier =__1__
MPW
Effect of a Tax Cut

The initial change in spending on domestic items from a change in ________
(T) is found by multiplying the economy’s ______________
______________ to consume by the size of the _______
then it is multiplied by the ______________

____________,
_______________ (1/MPA).
Only the amount used to buy ______________ _____________ represents
the initial spending increase.
 Total change in output =
- (MPC X change in T)
x
(1/MPA)
 -(MPC X T) has a minus sign because the spending change is in the
opposite direction to the tax change
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Relevance of the Spending Multiplier

When the economy is close to its potential level, the _____________ in
aggregate demand translates into ___________ price levels more than into
expanded production

When the stated goal being a stable economy and expanded output,
________________
____________
___________ is less effective the
closer the economy is to its potential

Similarly, for the __________________ fiscal policy, when the economy is
above its potential, a _____________ in aggregate demand means both price
level and total output will fall
Benefits of fiscal policy
Two benefits as stabilization tool:
1.___________________
2.___________________
Regional focus
 Discretionary fiscal policy can focus on particular regions.
E.g. During a recession, new government purchases and program to_________ the
amount of tax paid can be targeted to regions where unemployment rate
are______________ Net income revenue __________hit by unemployment and
falling output.
In a boom,__________ and__________ can be concentrated on the regions
where inflation is at its worst.____________ in net tax revenue in regional where the
economy is most over-heated.
Impact on spending
Fiscal policy direct impact on the spending through alters the government power.
Drawbacks of fiscal policy
1_______________ 2.________________ 3._____________
Label each definition with the corresponding terms.
Delays-- Recognition lag
Decision lag
Impact lag

___________________
The amount of time needed to formulate and implement an appropriate policy
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

___________________
The amount of time between a policy’s implementation and its having an effect
on the economy
___________________
The amount of time it takes policy-makers to realize that a policy needed.
Political visibility
Discretionary is highly visible element of government activity, therefore, it is often
affected by political and economic considerations.
E.G vote: increases in government purchases and reduce the taxes, regardless of
the appropriateness of these policies for the economy.
Public debt
Public debt
Total government
Public
debt charges
Label each definition with the corresponding terms.
___________________
The total amount owned by the federal government as a result of its past borrowing.
____________________
Include the debts of individuals’ provinces and territories and incorporates local
government and hospital
_____________________
: The amounts paid out each year by the federal government to cover the interest
The federal government’s public charge were37.2billion, the government should
pay 507.7 to bondholders. What is the average interest?
Average interest rate=public debt charge/public debt
charges on its public debt.
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12.3The Impact of Fiscal Policy
Budget surpluses and deficits

When the government’s expenditures and revenues are equal, we cell that
_____________

When the government’s revenues exceed its expenditures, we cell that
_________________

When the government’s expenditures exceed its revenues, we cell that
_________________


_______________= government revenues- government expenditures
________________= government expenditure – government revenue
The government’s debt represents the sum of its entire past budget deficits minus
any budget surpluses.
Fiscal Policy Guidelines and Recent Policy
Annually balanced budgets are:
Cyclically balanced budgets are:
Functional finance is:
Critics also say that an __________________________________ is not necessarily
appropriate for society and state it is flawed reasoning.
Defenders of functional finance are:
Economist who support cyclically or annually balanced budget
_____________________________________________________________________
_________
_____________________________________________________________________
_________
A) In the 1970s and early ______, Canada believed in ____________________ but
recently
had
made
unsuccessful
attempts
to
move
towards
_________________________.
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B) Total government deficits were highest during ____________________ in early
1980s and 1990s.
C) The 1980s deficit ______________________, while the 1990s deficits were
related to __________________________.
Keynes and His Influence:
Neoclassical theory is
__________________________________________________________
_____________________________________________________________________
_______
Flexible labour markets: Neoclassical economists suggest that both the demand and
supply of _________ depend on ______________, or ______________ expressed in
constant base-year dollars, rather than the ________________, which is valued in
current dollars.
There are two types of unemployment:
1.)
2.)
Voluntary unemployment exists whenever
_____________________________________________________________________
_______
Involuntary unemployment is when
_______________________________________________
_____________________________________________________________________
_______
Say’s Law:
Say argued that ____________________________________________
An example would be
_________________________________________________________
___________________________________________.
Think of other examples!
Keynes believed that workers are influenced by ___________________________
rather than__________________________ and ___________________________
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