FISCAL POLICY

1
FISCAL POLICY

• The Use of Taxes and Government Expenditures to
  achieve Macroeconomic Goals.
• What is Expansionary Fiscal Policy?
• What is Contractionary Fiscal Policy?

2
Automatic Stabilizers.

• Some Tax and Spending Programs Automatically
  reduce the Business Cycle.

3
Fiscal Policy with Unemployment
150
SAS
Price level (GDP deflator, 1992 100)
130
c
126
a
b
110
90
AD1
AD0
7
8
9
8.6
Real GDP (trillions of 1992 dollars)
4
Fiscal Policy at full employment
LAS
SAS1
a'
150
SAS2
Price level (GDP deflator, 1992 100)
c
130
126
a
110
AD1
90
AD0
7
8
9
8.6
Real GDP (trillions of 1992 dollars)
5
Can Fiscal Policy Affect AS?

• Labor supply and the income tax.
• Capital supply and the Income tax.

6
Can a tax cut pay for itself?

• Tax Revenue tax rate times income.
• A cut in taxes rates encourage people and
  companies to work harder generating more income.
• A lower tax rate times a higher income can
  generate less, the same, or more tax revenue than
  before.

7
The Flat tax.

• What does the flat tax mean?
• What are tax deductions?
• Would the same tax rate for everyone be fair?
• Would the same tax rate for everyone be
  efficient?

8
The lags of fiscal policy.

• Recognition time lag
• Action time lag.
• Effect time lag.

9
What are America's "Twin Deficits?

• 1. The Government Deficit
• 2. The Balance on Current Accounts Deficit
• How are the twins related?