1 / 17

Macro Chapter 11

Macro Chapter 11 . Fiscal Policy. Quick Review #1. Answer: E . Quick Review #2. If higher US interest rates cause foreign demand for the dollar to increase, which of the following will occur to the international value of the dollar and to US exports?

dawson
Télécharger la présentation

Macro Chapter 11

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Macro Chapter 11 Fiscal Policy

  2. Quick Review #1 • Answer: E

  3. Quick Review #2 • If higher US interest rates cause foreign demand for the dollar to increase, • which of the following will occur to the international value of the dollar • and to US exports? • International Value of the DollarExports • A. Increase Increase • B. Increase Decrease • C. Increase No Change • D. Decrease Increase • E. Decrease Decrease • Answer: B

  4. Quick Review #3 • Which of the following transactions would represent an addition to a nation’s current gross domestic product? • A. Ms. Smith purchases a share of stock in an automobile company • B. A retailer increases her stock of imported shoes • C. The government increases its domestic purchases of food for use by the military • D. A corporation sells shoes from last year’s inventory • E. A mother sells her car to her daughter • Answer: C

  5. Council of Economic Advisors (CEA) • Group of 3 economists appointed by the President to advise him on economic policy- mostly professors of economics • Obama and former Chr. Austin Goolsbee

  6. Fiscal Policy • Fiscal = “Financial” • Changes in government spending and taxation designed to achieve full employment, control inflation, and encourage economic growth

  7. Expansionary Fiscal Policy • Used during a recession to stimulate the economy Government has 3 Choices: • Increase government spending • Reduce taxes • Combo of both

  8. Fiscal Policy and theAD-AS Model Expansionary Fiscal Policy Full $20 Billion Increase in Aggregate Demand $5 Billion Additional Spending AS Recessions Decrease Aggregate Demand Price Level P1 AD1 AD2 $490 $510 Real Domestic Output, GDP

  9. 1. Increased Gov’t Spending • Ceteris Paribus, an increase in govt spending will shift the AD to the right • New spending on highways, schools, etc. will lead to more GDP • ***the multiplier leads to an even greater increase in demand

  10. 2. Reduce Taxes • Reducing taxes will also shift the AD curve to the right • ***Tax cuts must be greater than the increase in govt spending to achieve the same shift in GDP due to people saving part of a tax cut

  11. Reduced Taxes Example • If the govt cuts taxes by $6.67 Billion and the MPC is .75, what is the total change in GDP? • 6.67 x .75 = $5 billion consumed, and $1.67 B saved • $5 B x 4 (multiplier 1/.25) = increase of $20 B in GDP

  12. 3. Combo of Govt Spending and Tax Cuts • Ex- $1.25 B in increased government spending and $5 B tax cut with an MPC of .75 • Govt spending = 1.25 x 4 = $5 B • Tax Cut = 5 x .75 = $3.75 B increase x 4 = $15 • $5 B + $15 B = $20 B increase in GDP

  13. Contractionary (Restrictive) Fiscal Policy • Used to fight inflation • 3 Options: • 1. decrease govt spending • 2. raise taxes • 3. combo of the two

  14. 1. Decreased Govt Spending • Decreased spending shifts the AD curve to the left • If prices are inflexible downwards, this policy will stop the inflation rather than return to original price level

  15. 2. Increased Taxes • Reduces consumption spending since people will have less disposable income

  16. 3. Combo Reduced Spending and Tax Increase • Ex- $2 B decline in spending coupled with a $4 B increase in taxes (MPC of .75) • Spending = 2 x 4 (multiplier) = $8 B • Taxes = 4 x .75 = 3 x 4 (multiplier) = $12 B • $8 B + $12B = decrease of $20 B in GDP

  17. Fiscal Policy and theAD-AS Model Contractionary Fiscal Policy Recessions Decrease Aggregate Demand $5 Billion Initial Decrease In Spending AS Price Level Full $20 Billion Decrease in Aggregate Demand P1 AD4 AD3 $510 $522 Real Domestic Output, GDP

More Related