CH 13

changes in the budget balance measure fiscal policy

changes in the budget balance are the result of fluctuations in the economy

expansionary fiscal policy

increasing AD by more govt purchases, cut in taxes and increase in transfers (to close a recessionary gap)

government's borrowing may crowd out private investment spending,

increasing interest rates and reducing the economy's long-run rate of growth.

Government spends on:

interest payments education other g/s social security medicare/mediaid national defense other tranfers (payment to house)

debt-GDP ratio

is the government's debt as a percentage of GDP

output-potential / multiplier

decrease in ___-

fiscal policy lags:

it takes time to: realize recessionary/inflationary gap (collect data) develop a plan implement action (spend/decrease money)

Discretionary fiscal policy i

fiscal policy that is the result of deliberate actions by policy makers rather than rules. EX: Government may pass legislation, ONLY especially severe recessioN

cyclically adjusted budget balance It varies less than the actual budget deficit.

is an estimate of what the budget balance would be if real GDP were exactly equal to potential output. It fluctuates less than the actual budget deficit because years of large budget deficits also tend to be years when the economy has a large recessionary gap

deficit:

is the difference between the amount of money a government spends and the amount it receives in taxes over a given period

expansionary works 3 controversy

Government spending always crowds out private spending Government borrowing always crowds out private investment spending Government budget deficits lead to reduced private spending

The budget deficit tends to rise during recessions and fall during expansions. This reflects the effect of the business cycle on the budget balance.

Most economists believe that governments should run budget deficits in bad years and budget surpluses in good years. A rule requiring a balanced budget would undermine the role of automatic stabilizers.

a change in government transfers or taxes shifts the aggregate demand curve by less than change in government purchases, resulting in a smaller effect on real GDP

SMALLER MULTIPLIER EFFECT spend some of the transfers but not all TRANSFERS INCREASE GDP BY SMALLER AMOUNT

TAX REV AND GDP POSITIVELY

TRANSFERS AND GDP NEGITIVELY RELATED

Lump-sum taxes are taxes that don't depend on the taxpayer's income.

With lump-sum taxes there is no change in the multiplier.

by increasing the government's debt, place financial pressure on future budgets.

a government paying large sums in interest must raise more revenue from taxes or spend less than it would otherwise be able to afford

Implicit liabilities : ex Social Security and Medicare./aid

are spending promises made by governments that are effectively a debt despite the fact that they are not included in the usual debt statistics.

The government control aggregate spending (gdp formula) DIRECTLY, and indirectly with Consumer & investment spending

because changes in taxes and transfers, it also influences consumer spending (C) and, in some cases, investment spending

budget deficits tend to get smaller or even turn into surpluses when the economy is expanding

because the eco could start producing more GDP past potential

The budget tends to move into deficit when the economy experiences a recession

because the government is spending more money to expand the eco by to potential output

It's important to realize that business-cycle effects on the budget balance are temporary:

both recessionary gaps (in which real GDP is below potential output) and inflationary gaps (in which real GDP is above potential output) tend to be eliminated in the long run.

Ex: MPC = 0.5 MULTIPLIER= 2 AUTONOMOUS: $50 Billion INCREASE in purchase INCREASE GDP BY $50 billion*2 GDP = 100$ consumers spending rise 50bill invest spending rise 50 bill

change in PURCHASE = change in GDP = change in SPENDING PURCHASES INCREASE GDP BY SAME AMOUNT

government spends more than the tax revenue it receives—almost always borrows the extra funds budget deficit

debts.

contractionary fiscal policy

decreasing AD by less govt puchases, rise in taxes and decrease in transfer (to close an inflationary gap)

Funds in: taxes and borrowing

funds out: transfers and purchases

Public debt is

government debt held by individuals and institutions outside the government.

Automatic stabilizers are spending tax

government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands.

budget deficit moves with the unemplyment rate

he budget deficit almost always rises when the unemployment rate rises and falls when the unemployment rate falls.

Taxes Government collect:

income taxes corporate profit social insurance taxes (other state / local taxes)

disposable income:

income they spend+transfers-taxes

So the budget tends to move toward surplus during expansions

oward deficit during recessions even without any deliberate action on the part of policy makers. (automatic stab)

saving by government= tax revenue-purchases-transfers

sg=t-g-tr

If the government's debt grows more slowly than GDP, the burden of paying that debt is actually falling compared with the government's potential tax revenue.

the debt-GDP ratio can fall, even when debt is rising, as long as GDP grows faster than debt.

multiplier is 1/(1 − MPC)

the ratio of the change in real GDP caused by an autonomous change in aggregate spending (GOVERNMET)

debt

the sum of money the govt owes at a particular time --- stock

social insurance 3 big: social secirty medicare/aid

to protect families against economic hardships (governtment programs)

expansionary fiscal policies make a budget surplus smaller(LESS MONEY) or a budget deficit bigger

contractionary fiscal policies increase the budget balance for that year, (MORE MONEY) making a budget surplus bigger or a budget deficit smaller.

expansionary policy: INCREASE in GDP => larger than initial rise in spending

contractionary policy: DECREASE in GDP => larger than initial rise in spending