1 chapter 7 fiscal policy these slides supplement the textbook, but should not replace reading the...
TRANSCRIPT
1
Chapter 7 Fiscal Policy
These slides supplement the textbook, but should not replace reading the textbook
2
Who were theClassical Economists?A group of the 18th and 19th centuries, including Adam Smith known as the father of modern day economics
3
What did Adam Smith and the Classical
Economists believe?The economy was always tending toward a full employment equilibrium and stable prices
4
What doeslaissez-faire mean?
Leave well enough alone, let the economy correct problems itself
5
What happened in the Depression of 1921?
Even though it was serious the government practiced laissez-faire and the economy recovered in a short period of time
6
What were policies of President Herbert Hoover
in the early 1930s to combat the depression?
public works projects raised taxes loans to failing firms relief programs
7
What were policies of President Franklin
Roosevelt in 1933 to combat the depression? public works projects and
social welfare programs raised taxes and wages loans to failing firms relief programs
8
According to Robert Reich, an American political
economist and professor, what was the result of these
government programs?
These programs helped save American capitalism
9
According to Thomas Woods author of Meltdown, what
was the result of these government programs?
These programs prevented the economy from seeking its equilibrium of full employment and prolonged the depression
10
What is a fiscal policy?
The manipulation of government purchases, transfer payments, taxes, and borrowing in order to positively influence the economy
11
How did Keynes influence fiscal policies?He argued that fiscal policies may be necessary to bring about full employment
12
How did World War II affect fiscal policies?It showed that a government stimulus package can work
13
What is theEmployment Act of 1946?Its main purpose was to lay the responsibility of economic stability of inflation and unemployment onto the federal government
14
What are the four phases of the
business cycle?• trough• recovery• peak• recession
15
What are the 3 pillars of
Keynesian Economics?
• Liquidity trap• Balanced budget multiplier• Paradox of thrift
16
What is a liquidity trap?
A lack of borrowing keeps money bottled up in savings institutions
17
What is the Keynesian solution to
a liquidity trap?Government borrows the money that consumers and business do not borrow
18
What is the Balanced Budget
Multiplier?When the government taxes and spends the money there is a multiple effect because of no savings
19
What is the Paradox of Thrift?
The more people save, the less will be demand, which leads to slow growth
20
What does crowding out mean?
During periods of full employment the government can borrow money that otherwise would be spent or invested
21
How does the government borrow
money?It sells bonds (securities) to the Fed or in the Open Market
22
What is the current national debt?
Just over $17.5 trillionhttp://www.usdebtclock.org/
23
What does monetizing the debt mean?
The federal government sells bonds (securities) to the Fed and the Fed creates the money to buy the bonds
24
What can monetizing the debt lead to?
A fall in the value of the dollar and inflation
25
What is a discretionary fiscal
policy?Government policies that require ongoing decisions by policy makers
26
What are some examples of fiscal policies?
Government purchasesTransfer paymentsTaxes
27
What are automatic stabilizers?
Structural features of government spending and taxation smooth out fluctuations in booms and busts
28
What are some examples of
automatic stabilizers?Unemployment paymentsWelfareOther govt. programs
29
What is the point of Keynesian Economics?The economy could be stuck at equilibrium below the potential output for a prolonged period of time
30
What is an expansionary fiscal policy?
An increase in government purchases, decrease in net taxes, or some combination of the two aimed at increasing aggregate demand
31
When would the government use
expansionary fiscal policies?
To stimulate the economy when unemployment is greater than the natural rate
32
What is a contractionary fiscal policy?
A decrease in government purchases, increase in net taxes, or some combination of the two aimed at reducing aggregate demand
33
When would the government use
contractionary fiscal policies?
To slow down the economy when inflation is more than desired
34
What is the typical Keynesian policy
during recessions?To use discretionary fiscal policies to stimulate the economy to a full employment equilibrium
35
What is the multiplier?
Any change in the level of spending has a multiple effect on GDP
36
What is the accelerator?Any increase in spending can lead to an increase in secondary spending, for example, a new highway may lead to more restaurants, hotels, and gas stations
37
When does the accelerator have most impact on spending?
During periods of full employment
38
How did World War II affect fiscal policies?It showed that a government stimulus package can work
39
What is MPC?The marginal propensity to consume (MPC) is a measure of how much consumers will spend out of any addition to their income
40
What is MPS?The marginal propensity to save (MPS) is a measure of how much consumers will save out of any addition to their income
41
If MPC is ¾, what is MPS?
MPS would be ¼ because MPC + MPS = 1
42
What is the value of the multiplier?
1 / MPS
43
If MPC is ¾, what is the value of the
multiplier?1 / ¼ = 4
44
$100.00$75.00$56.25$42.19$31.64
...
$400.00
original spent
total money
45
What effect does an increase in demand have
on prices and output?The more steeply sloped the supply curve the greater impact on prices and the less impact on employment
46
Slightly sloped Supply Curve
Real GDP
PriceLevel SRAS
AD
AD*
47
Steeply sloped Supply Curve
Real GDP
PriceLevel SRAS
AD
AD*
48
How effective are fiscal policies?
Automatic stabilizers are more effective than are discretionary fiscal policies
49
Should we rely on automatic stabilizers?
The stronger and more effective the automatic stabilizers are, the less need there is for discretionary fiscal policies
50
How effective were fiscal policies during the
stagflation of the 1970’s?
Whatever we did to fight one problem we made the other problem worse
51
What are lag effects?Recognition lagDecision lagAction lag
52
Do lag effects influence discretionary
fiscal policies?Yes, they weaken fiscal policies as a tool of economic stabilization
53
What is one’spermanent income?
Income that individuals expect to receive on average over the long term
54
Do consumers base their decisions on their
permanent income or their short term income?
Perceived long term income
55
What is one thing policy makers often overlook?
How fiscal policies unintentionally affect individual incentive to work, save and invest
56
What is theLaffer Curve?
A curve that shows that starting from zero an increase in taxes will raise revenue but beyond a point an increase will lower revenues
57
What is the Laffer Curve?
58
What issupply side economics?The belief that real GDP can be increased by giving people incentives to work
59
What was fiscal policy in the Reagan Administration
of the 1980’s?Taxes were decreased to stimulate the economy by increasing aggregate supply
60
What effect does politics have on fiscal policies?There is always the danger that politicians can use discretionary fiscal policies to suit their short term political goals
61
Does the federal deficit affect fiscal policies?If we were to increase spending by borrowing, the national debt could become unmanageable
62
Watch video on the National Debt
http://video.search.yahoo.com/video/play?p=national+debt&n=21&ei=utf-8&js=1&fr2=tab-web&tnr=20&vid=000165545891
63
What is the difference between a stock and a flow way of thinking? An example of a stock situation would be an increase in government spending has no opportunity costs
64
If we spend a dollar do we pay for that
dollar here and now? Yes, either by higher taxes, higher interest rates if we borrow the money, or more inflation if we create the money
65
END