tailieunhanh - Lecture Issues in economics today - Chapter 11: Fiscal policy

After studying this chapter you will be able to: Describe and model discretionary and nondiscretionary fiscal policy using an aggregate supply and aggregate demand diagram, distinguish between aggregate demand and aggregate supply shocks, acknowledge and enumerate the problems associated with discretionary fiscal policy, describe nondiscretionary fiscal policy as the mainstay of our current macroeconomic system. | Chapter 11 Fiscal Policy Chapter Outline NONDISCRETIONARY AND DISCRETIONARY FISCAL POLICY USING FISCAL POLICY TO COUNTERACT “SHOCKS” EVALUATING FISCAL POLICY Fiscal Policy Fiscal Policy is the purposeful movement in government spending or tax policy designed to direct an economy Discretionary Fiscal Policy: government spending and tax changes enacted at the time of the problem to alter the economy Nondiscretionary Fiscal Policy: that set of policies that are built into the system to stabilize the economy How Nondiscretionary Fiscal Policy Works Nondiscretionary fiscal policy consists of policies that are built into the system so that an expansionary or contractionary stimulus can be given automatically. The welfare state and the progressive income tax serve as the built-in policies. If the economy is in recession, those who lose their jobs are granted unemployment and welfare benefits and they owe less in taxes. If the economy is growing at an unsustainable rate, people are making a . | Chapter 11 Fiscal Policy Chapter Outline NONDISCRETIONARY AND DISCRETIONARY FISCAL POLICY USING FISCAL POLICY TO COUNTERACT “SHOCKS” EVALUATING FISCAL POLICY Fiscal Policy Fiscal Policy is the purposeful movement in government spending or tax policy designed to direct an economy Discretionary Fiscal Policy: government spending and tax changes enacted at the time of the problem to alter the economy Nondiscretionary Fiscal Policy: that set of policies that are built into the system to stabilize the economy How Nondiscretionary Fiscal Policy Works Nondiscretionary fiscal policy consists of policies that are built into the system so that an expansionary or contractionary stimulus can be given automatically. The welfare state and the progressive income tax serve as the built-in policies. If the economy is in recession, those who lose their jobs are granted unemployment and welfare benefits and they owe less in taxes. If the economy is growing at an unsustainable rate, people are making a lot of money and are faced with higher tax rates and there are fewer people eligible for government benefits. How Discretionary Fiscal Policy Works If we are in a recession the fiscal policy to stimulate the economy would consist of Increases in government spending Decreases in taxes If we are in an inflationary period the fiscal policy to contract the economy would consist of Decreases in government spending Increases in taxes Expansionary Fiscal Policy AS AD RGDP PI RGDP* PI* AD’ RGDP’ PI’ Contractionary Fiscal Policy AS AD RGDP PI PI* RGDP* AD’ PI’ RGDP’ Shocks A Shock is any unanticipated economic event. Aggregate Demand Shock: an unexpected event which causes aggregate demand to increase or decrease, . the Sept 11, 2001 terrorist attacks. Aggregate Supply Shock: an unexpected event which causes aggregate supply to increase or decrease, . Iraq’s 1990 invasion of Kuwait and threat to Saudi Arabia. Nondiscretionary and Discretionary Fiscal Policy Combats a Recession AS PI RGDP .

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