Fiscal Policy 2012 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of 9-1
Jan 17, 2016
Fiscal Policy2012
Copyright 2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
9-1
Learning Objectives
• Discuss the implications of and complications associated with fiscal policy within the aggregate demand–aggregate supply framework
Copyright 2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
9-2
Federal Government Finance• Federal expenditures
– large expenditure on social security and welfare– specific purpose grants
• Federal revenues– Personal income tax– Company income tax– Indirect and other taxes
• GST• excise tax
Copyright 2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
9-3
Discretionary Fiscal Policy
• The deliberate manipulation of taxes and spending by government for the purpose of altering real GDP and employment, controlling inflation and stimulating economic growth
• Not all fiscal policy is deliberate, a range of automatic stabilisers are discussed later
Copyright 2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
9-4
Expansionary Fiscal Policy
• Increased government spending or lower taxes or increased transfer payments (social security payments) to reduce the effects of recession, i.e. boost GDP and reduce unemployment
Copyright 2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
9-5
Expansionary Fiscal Policy
Copyright 2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
9-6
ASLS
Qp
Pric
e le
vel
Real gross domestic product
AS1
AD2
Q1
AD1
P1
Q2
P2
Contractionary Fiscal Policy
• Decreased government spending or higher taxes or a reduction in transfer payments in order to reduce inflation during a boom
Copyright 2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
9-7
Contractionary Fiscal Policy
Copyright 2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
9-8
ASLS
Qp
Pric
e le
vel
Real gross domestic product
AS1
AD1
Q1
AD2
P1
P2
Non-Discretionary Fiscal Policy• Built-in or automatic stabilisers that operate without
requiring explicit action by policy-makers, they are the result of a progressive income taxes and a social security system
• During recessions: Tend to increase government deficits (or reduce surplus) through lower taxes and higher welfare payments
• During inflationary periods: Tend to increase government surpluses (or reduce deficits) through higher taxes and lower welfare payments
Copyright 2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
9-9
Automatic or Built-in Stabilisers
• Tax receipts: Increase as real GDP increases, so the economy slows
• Transfers: Decrease as real GDP increases, but increase when the economy slows so GDP and AD increase.
• Do not fully correct the economy, only reduces the severity of fluctuations
• Useful when economy is operating around full employment
• Can cause problems: Fiscal DragCopyright 2004 McGraw-Hill Australia
Pty Ltd PPTs t/a Macroeconomics 7/e by Jackson
and McIverSlides prepared by Muni Perumal, University of Canberra, Australia
9-10
Automatic or Built-in Stabilisers
Copyright 2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
5-11
Le
vel o
f b
usi
ne
ss a
cti
vit
y
Time
Flatten out the fluctuations in the business cycle, but do not eliminate them completely
Problems with Fiscal Policy in Practice
• Problems of timing– Recognition lags– Administrative lags– Operational lags
• Political problems– Other economic goals, economic growth
complements and conflicts with other policies– Expansionary bias, often not used stimulate rather
than slow the economy– The political cycle may accentuate the business cycle.
Copyright 2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
9-12
Fiscal Policy and Aggregate Supply
• Fiscal policy, especially tax changes, affects not only aggregate demand but can affect aggregate supply
• Tax changes in the form of incentives to businesses and individuals as well as government spending in infrastructure can lead to a rightward shift in the AS in addition to increasing AD, providing a further stimulus to the economy in terms of lower prices and higher GDP
Copyright 2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
9-13
Supply-Side Effect of Fiscal Policy
Copyright 2004 McGraw-Hill Australia Pty Ltd
PPTs t/a Macroeconomics 7/e by Jackson and McIver
Slides prepared by Muni Perumal, University of Canberra, Australia
9-14
ASLS
Qp
Pric
e le
vel
Real gross domestic product
AS1
AD2
Q1
AD1
P1
AS2
Q2
P2
P3 =
Q3
9-25
9-26
9-27
9-28