Download Eco 200 – Principles of Macroeconomics

Eco 200 – Principles of
Macroeconomics
Chapter 12:Fiscal Policy
Fiscal Policy – Keynesian
region
Fiscal policy – intermediate
region
Fiscal policy – classical region
Multipliers



Government spending multiplier =
1 / (MPS + MPI)
Lump-sum tax multiplier =
-(MPC-MPI) / (MPS + MPI)
Balanced-budget multiplier = effect of
equal changes in G and T = 1
Government budget constraint

Government spending = taxes +
change in government debt + change in
government-issued money
Tax finance of government
spending


Balanced-budget multiplier = 1
Offsetting effects:

Incentive effects may reduce labor supply
and cause a reduction in AS

Laffer curve
Deficit financing of
government spending

Ricardian equivalence:


Individuals may save more in response to
higher expected future taxes
Crowding out:

Increased borrowing leads to higher
interest rates; resulting in a reduction in I
and C (discussed more extensively shortly)
Monetary expansion used to
finance government spending


Due to autonomy of Fed, this is less
likely to occur in the U.S. today.
If used, tends to be inflationary,
resulting in a reduction in C.
Discretionary fiscal policy vs.
automatic stabilizers


Discretionary fiscal policy: changes in
government spending, taxes, and/or transfer
payments to achieve a macroeconomic policy
goal
Automatic stabilizers: automatic increase in
transfers and tax reductions as income falls
(the reverse holds when income rises)


Examples: unemployment compensation, income
tax, welfare programs.
Automatic stabilizers reduce the value of the
multiplier.
Tax structures



Proportional tax: Tax / income is
constant as income rises
Progressive tax: Tax / income rises as
income rises
Regressive tax: Tax / income declines
as income rises
Deficits and debt




Deficit = G – T = amount by which
government spending exceeds net taxes
Debt = total stock of outstanding
government bonds
Deficit = a flow variable
Debt = a stock variable
Deficits, interest rates, and
investment

Loanable funds model
Demand for loans
Supply of loans
Equilibrium
Increase in deficit
Costs of deficit



Crowding out: higher interest rates result in
less investment
Higher deficit results in currency appreciation
and a decline in net exports (X)
Interest payments – redistribution of income


Regressive?
Foreign debt holdings
Foreign fiscal policy


Share of GDP devoted to G is smaller in
the U.S. than in most developed
economies
Value-added taxes are commonly used
in most other developed economies