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1、CH07FISCALPOLICY,Referstochangesingovernmentexpendituresand/ortaxestoachieveparticulareconomicgoals,suchaslowunemployment,pricestability,andeconomicgrowth.Governmentexpendituresisthesumofgovernmentpurchasesandtransferpayments.,FISCALPOLICY,FISCALPOLICY,Fiscalpolicyinfluencessaving,investment,andgrow
2、thinthelongrun.Intheshortrun,fiscalpolicyprimarilyaffectstheaggregatedemand.Whenpolicymakerschangethemoneysupplyortaxes,theeffectonaggregatedemandisindirectthroughthespendingdecisionsoffirmsorhouseholds.Whenthegovernmentaltersitsownpurchasesofgoodsorservices,itshiftstheaggregate-demandcurvedirectly.
3、,ChangesinGovernmentPurchases,Therearetwomacroeconomiceffectsfromthechangeingovernmentpurchases:ThemultipliereffectThecrowding-outeffect,TheMultiplierEffect,Governmentpurchasesaresaidtohaveamultipliereffectonaggregatedemand.Eachdollarspentbythegovernmentcanraisetheaggregatedemandforgoodsandservicesb
4、ymorethanadollar.Themultipliereffectreferstotheadditionalshiftsinaggregatedemandthatresultwhenexpansionaryfiscalpolicyincreasesincomeandtherebyincreasesconsumerspending.,TheMultiplierEffect,Quantityof,Output,Price,Level,0,Copyright2004South-Western,AFormulafortheSpendingMultiplier,Theformulaforthemu
5、ltiplieris:Multiplier=1/(1-MPC)IftheMPCis3/4,thenthemultiplierwillbe:Multiplier=1/(1-3/4)=4Inthiscase,a$20billionincreaseingovernmentspendinggenerates$80billionofincreaseddemandforgoodsandservices.,TheCrowding-OutEffect,Fiscalpolicymaynotaffecttheeconomyasstronglyaspredictedbythemultiplier.Anincreas
6、eingovernmentpurchasescausestheinterestratetorise.Ahigherinterestratereducesinvestmentspending.Thisreductionindemandthatresultswhenafiscalexpansionraisestheinterestrateiscalledthecrowding-outeffect.Thecrowding-outeffecttendstodampentheeffectsoffiscalpolicyonaggregatedemand.,TheCrowding-OutEffect,Qua
7、ntity,ofMoney,Quantityfixed,bytheFed,0,Interest,Rate,Moneydemand,MD,Money,supply,(a)TheMoneyMarket,Quantity,ofOutput,0,Price,Level,Aggregatedemand,AD1,(b)TheShiftinAggregateDemand,Copyright2004South-Western,ChangesinTaxes,Whenthegovernmentcutspersonalincometaxes,itincreaseshouseholdstake-homepay.Hou
8、seholdssavesomeofthisadditionalincome.Householdsalsospendsomeofitonconsumergoods.Increasedhouseholdspendingshiftstheaggregate-demandcurvetotheright.,AutomaticStabilizers,Automaticstabilizersarechangesinfiscalpolicythatstimulateaggregatedemandwhentheeconomygoesintoarecessionwithoutpolicymakershavingt
9、otakeanydeliberateaction.Automaticstabilizersincludethetaxsystemandsomeformsofgovernmentspending.Examples:incometaxunemploymentinsurancewelfare,DiscretionaryFiscalPolicy,DiscretionaryFiscalPolicyisdeliberatechangesofgovernmentexpendituresand/ortaxestoachieveparticulareconomicgoals.AutomaticFiscalPol
10、icyischangesingovernmentexpendituresand/ortaxesthatoccurautomaticallywithout(additional)congressionalaction.,DiscretionaryFiscalPolicy,Expansionaryfiscalpolicyreferstoincreasesingovernmentexpendituresand/ordecreasesintaxestoachievemacroeconomicgoals.Contractionaryfiscalpolicyattemptstodecreasegovern
11、mentexpendituresand/orincreasesintaxestoachievemacroeconomicgoals.,FiscalPolicyandFullEmployment,P1,Y1,P,RealGDP,Duringarecession,thegovernmentcanstimulatetheeconomybyincreasinggovernmentspendingordecreasingtaxes.,AD1,AD2,Yp,LRAS,SRAS,P2,FiscalPolicyandPriceStability,P2,Yp,P,RealGDP,Duringaninflatio
12、naryperiod,thegovernmentcancontracttheeconomybydecreasinggovernmentspendingorincreasingtaxes.,AD2,AD1,Y1,LRAS,SRAS,P1,TwoKeyAssumptions,Inourdiscussionoffiscalpolicy,weonlydealwithdiscretionaryfiscalpolicy.Weassumethatanychangeingovernmentspendingisduetoachangeingovernmentpurchasesandnottoachangeint
13、ransferpayments.,Demand-SideFiscalPolicy,Achangeinconsumption,investment,governmentpurchases,ornetexportscanchangeaggregatedemandandthereforeshifttheADcurve.Achangeintaxescanaffectconsumptionorinvestmentorbothandthereforcanaffectaggregatedemand.,FactorsThatChangeAggregateDemand,FiscalPolicy:AKeynesi
14、anPerspective,KeynesianTheorytheamountofmoneytheycanearnbyworkingincreases.Intheanalysisofmarginaltaxratesandaggregatesupply,weimplicitlyassumethatintheaggregate,amarginaltaxratecutincreasesworkactivity.,ThePredictedEffectofaPermanentMarginalTaxRateCutonAggregateSupply,TheLafferCurve:TaxRatesandTaxR
15、eturns,Ifincometaxrateswerelowered,woulditincreaseordecreasetaxrevenue?Therearetwotaxratesatwhichzerotaxrevenueswillbecollected0and100%.Anincreaseintaxratescouldcausetaxrevenuestoincrease.Adecreaseintaxratescouldcausetaxrevenuestoincrease.Taxrevenues=(Taxbase)x(theaverageTaxrate),TheLafferCurve:TaxR
16、atesandTaxReturns,TheLafferCurve:Implications,Weassumethatasthetaxrateisreduced,thetaxbaseexpands.Therationaleisthatindividualsworkmore,investmore,andenterintomoreexchanges,andshelterlessincomefromtaxesandlowertaxrates.Howmuchdoesthetaxbaseexpandfollowingthetaxratereduction?Taxrevenuesincreaseifataxreductionismadeinthedownward-slopingportionofthecurve(betweenpointsBandC);taxrevenuesdecreasefollowingataxratereductioni
