Fiscal Policy

Two Benefits of Reaganomics

1. Ended stagnation of 1970s (increased production).2. Disinflation

Two benefits of national healthcare

1. Everyone will have healthcare. 2. Everyone will receive complete treatment, without bills that limit their operations.

Tow detriments of Reaganomics

1. Increased wage inequality 2. Increased immigration as a source of cheap labor.

Two detriments of national healthcare

1. It will increase taxes. 2. Lose your ability to choose your doctor.

Limitation of Supply Side Economics

1. No sure fire way to find where we should be on the curve. 2. Cannot predict economic behaviors. 3. SSE policy is view as unfair by some. 4. The "new" revenues are not sufficient to balance budget. 5. Loss of social benefits.

Elements in Reaganomics

1. Personal + corporate tax cuts 2. Spending cuts on social programs/ entitlements 3. Regulatory reform = deregulation

GNP=

C + I + G + F (market value of consumer goods, government goods, investment goods, net exports)

Discretionary Fiscal Policy

Choices, not required. Government actions that use the tools- taxes, tax incentives, and government spending.

What should the discretionary fiscal policy do with 10% unemployment?

Decrease taxes Increase tax incentives Increase government spending

Multiplier Effect

Explains how small changes in income ripple through the economy and eventually cause a much larger change in spending.

Supply Side Economics

Government Actions that provide incentives to producers to increase aggregate supply by households, business firms, and the government.

Government spending

Government expenditures, both chosen and required for a variety of programs and entitlements.

Progressive Income Tax

Higher incomes are entered as a higher rate.

Laffer Curve

Illustrates how tax cuts affect tax revenues. Argues that tax cuts can increase government revenues because they give HH + BF incentives to work, invest + produce.

What should the government do with 13% inflation?

Increase taxes Decrease tax incentives Decrease government spending

Restrictive Fiscal Policy leads to

Increases taxes + decreasing tax incentives + decreases government spending. Reduces inflation + aggregate demand

Personal and Corporate Tax Cuts

Marginal tax rates reduced (rich from 70%-28%). Households and businesses firms now have more disposable income to invest.

Investment Tax Credit

Permits firms to deduct from their corporate income taxes a percentage of the money they spend on new capital. To reduce unemployment, congress raises the investment tax credit, to lower inflation it lowers the investment tax credit.

According to Keynes, if the aggregate demand decreases . . .

Production will decrease and unemployment will increase.

According to Keynes, if the aggregate demand increases . . .

Production will increase and unemployment will decrease.

Automatic Stabilizers

Provide a constant injection of money into the economy.

Supply side view on regulation

Regulation decreases economic growth.

Regulatory Reform = Deregulation

Regulations increase cost of production for business firms, reduce innovation, and reduce research + development. Too many federal agencies (EPA/CSPC/FDA). Deregulate finance, pharmaceutical/ manufacturing sectors + diminish government spending.

Tax Incentives

Special tax breaks that the government extends to businesses.

Saye's Law

Supply creates its own demand. Economic growth depends on producer's willingness + ability to increase production.

Marginal Prosperity to Consume

The fraction of income spent.

Marginal Prosperity to Save

The fraction of income that people save.

Fiscal Policy

The government's use of taxes, spending, and transfer payments to promote economic growth and stability. Fights unemployment and inflation, but not simultaneously.

Aggregate Demand

The total consumption of goods and services by households, business firms, and the government.

Demand Side Economics

The use of fiscal policy to regulate aggregate demand.

Spending Cuts on Social Programs/ Entitlements

These add to your tax burden and are dis-incentive to work. (school lunches -ketchup, social security benefits- stop at age 18)

What are the four main limitations of fiscal policy in regulating aggregate demand?

Timing problems Unpredictable economic behaviors Political controversy Lack of coordination

Public Transfer Payments

When tax dollars get redistributed to non-productive portions of the economy. (Entitlements: unemployment insurance, welfare, social security)

Non-discretionary Fiscal Policy

You do not have a choice. Economic policies activated by actions, built in features of tax/ tax incentives/ government spending programs. These are economic stabilizers.

Using the marginal prosperity to consume and an injection into the economy, how do you determine the increase in spending?

decimal percent * the increase in spending