Macro Chapter 16

The effects on AS of decreasing each of the following taxes

1. Decrease the marginal taxes rates on individual income will reduce the tax wedge forced by workers, increase the quantity of labor supplied 2. Decrease in the marginal corporate tax rates would encourage investment spending by increasing the return firms would receive from new investment 3. Decrease the tax rates on capital gains & dividends the supply of loanable funds from households to firms would increase, increasing saving & investment

Deficits increase during a recession for 2 reasons:

1. During a recession wages & profits decrease - government tax revenues decrease 2. The government automatically increases its spending on transfer payments when the economy moves into a recession

crowding out

A decrease in private expenditures as a result of an increase in government purchases

fiscal policy

Changes in federal taxes & purchases that are intended to achieve macroeconomic policy objectives

What is the problem with a large debt?

If debt increases interest rates - it might decrease investment spending. In the LR - lower investment means a lower capital stock

expansionary fiscal policy

Increase in Government spending will increase our Aggregate Demand - rightward shift Decrease in income taxes - will increase household Disposable Income - increase consumption- increasing Aggregate Demand -rightward shift Decreasing taxes on business income - increase investment spending - increasing AD

automatic stabilizers

Some types of government spending & taxes, which automatically increase & decrease along with the business cycle

tax wedge

The difference between the pre-tax & pot-tax return to an economic activity

federal government debt (national debt)

The total value of US treasury bonds outstanding

If we have a budget deficit & a recession an attempt to balance the budget, government would have to increase taxes or decrease government expenditures.

This would decrease AD - making the recession worse. We should do the opposite - decrease T or increase G to increase AD

The size of the federal government expanded greatly during the Great Depression

Total federal expenditures rose from 1950 to the early 1990s, fell from 1992 to 2001, & have risen since 2001

When the federal government runs a budget deficit, the treasury must

borrow funds from investors by selling US treasury bonds

If expenditures > revenues

budget deficit

If expenditures < revenues

budget surplus

Decreases in G or increase in T

can keep real gdp from moving beyond its potential level

Contractionary fiscal policy involves

decreasing government purchases or increasing taxes

Expansionary fiscal policy

involves increasing government purchases or decreasing taxes

Deficit increases during a & decrease during

recessions; expansions

Policy makers use contractionary fiscal policy to

reduce increase in AD that seem likely to lead to inflation

Economists look at the cyclical adjusted budget deficit or surplus

that is the deficit or surplus if the economy were at potential gdp

Most of the increase in the federal budget deficit during recessions takes place because of

the effects of the automatic stabilizers ⇒built in stabilizers that automatically "kick in" to stabilize the ups & downs of the business cycle

The greater the sensitivity of C, I & net exports to a change in interest rates,

the greater the crowding out will be

The goal of both expansionary monetary policy & expansionary fiscal policy is

to increase aggregate demand relative to what it would have without the policy

The tax wedge applies to the marginal tax rate,

which is the fraction of each additional dollar of income that must be paid in taxes

Getting the timing right can be more difficult

with fiscal policy than with monetary policy