The Short Run: Countercyclical Fiscal Policy Fiscal policy In the short run Has demand-side effects on output and employment Countercyclical fiscal policy.
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
1
The Short Run: Countercyclical Fiscal Policy
• Fiscal policy• In the short run• Has demand-side effects on output and
employment• Countercyclical fiscal policy
• A change in government purchases or net taxes
• Designed to reverse or prevent a recession or a boom
• Increase in government purchases• Direct way to cure a recession• Aggregate expenditure line shifts upward• ΔGDP = Multiplier ˣ ΔG• ΔG = ΔGDP / Multiplier • Multiplier = 1/(1-MPC)
Initially, the economy’s equilibrium is at full-employment output of $10,000 billion (Point A). Then a decrease in investment spending shifts the aggregate expenditure line down to AE2, and the economy starts heading toward point B—a recession. The government could shift the AE line back to its original position by increasing its own purchases, or by decreasing net taxes with a change in tax or transfer policies. If the change were enacted quickly enough, the government could prevent the recession.
A
AE2
B
$9,000(RecessionOutput)
$10,000(Full-EmploymentOutput)
4
The Short Run: Countercyclical Fiscal Policy
• Cut net taxes (taxes – transfer payments)• Indirect way to cure a recession• Increase disposable income• Increase consumption spending• Aggregate expenditure line shifts upward• ΔGDP = Net tax multiplier ˣ Δ Net taxes• Net tax multiplier = - MPC ˣ Expenditure
In any given year, the deficit (relative to GDP) is the difference between federal revenue and federal outlays as percentages of GDP. The deficit rises in recessions (shaded) and rises further if fiscal policy is used to fight the recession, as in 2009.
10
Figure 2b: Federal outlays, revenue, & surplus or deficit, 1959–2009
In any given year, the deficit (relative to GDP) is the difference between federal revenue and federal outlays as percentages of GDP. The deficit rises in recessions (shaded) and rises further if fiscal policy is used to fight the recession, as in 2009.
11
Long Run: Deficits and the National Debt
• In a recession• Transfers rise and tax revenue falls• Budget deficit automatically increases• Or the budget surplus decreases
• In an expansion• Transfers decrease and tax revenue rises• Budget deficit automatically decreases• Or the budget surplus increases
Debt as a percentage of GDP soared during World War II, then fell steadily for several decades. It rose during the 1980s, fell in the 1990s, rose in the early 2000s, and then surged in 2008–2009 due to recession and recession-fighting fiscal policies
15
The National Debt: Myths and Realities
• The total national debt • In mid-2009, it was approaching $12 trillion• Amounts that government owes to the public
($7 trillion)• It has macroeconomic impact
• Amounts that one government agency owes to another ($5 trillion)• No macroeconomic impact at all
• Three scenarios in which a nation’s debt problem can become very costly• A national debt that is growing too rapidly• A debt approaching a national credit limit • Failing to account for future obligations
U.S. Fiscal policy during recession of 2008–2009• Early 2009 - fiscal stimulus package
• The American Reinvestment and Recovery Act = $787 billion over two years• one-third was tax cuts• one-third was greater government purchases• One-third was increased transfer payments
• To help those most directly affected by the recession• To state and local governments (to help them avoid
raising their own taxes or cutting their own outlays)
U.S. Fiscal policy during recession of 2008–2009• Beyond the fiscal stimulus: long-run budget
projections• “Extended Baseline Scenario”
• Assumes that there will be no change in current fiscal policies, other than the expiration of temporary stimulus programs
• Debt ratio rises because of the aging of the population, and increases in Social Security and Medicare payments that will be required under current law