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MACROECONOMICS CHAPTER 29: Fiscal Policy  Fiscal policy involves changes in taxes and spending by the government  To achieve o Full employment o Price stability o Long-term economic growth Federal Budget  The annual statement of revenues and expenditures by the government o Budget surplus o Budget deficit o Balance budget  Government revenues o Income tax o Corporate tax o Indirect tax  Government expenditure o Transfer payments (unemployment checks) o Expenditures on goods and services o Debt interest payment Deficit and Debt  Deficits: Budget deficits add to the gov’t. debt  Debt: The total amount of government borrowing Demand Side effect of tax Changes  Tax increases decreases disposable income and decrease aggregate demand  as a result, AD curve shifts out and to the left o contractionary (tight) fiscal policy Supply side effect of tax changes  tax increases may also effect supply side of economy o higher income taxes weaken the incentive to work and decrease the supply of labour o there is a smaller quantity of labour and lower potential GDP  a tax cut would increase the supply of labour, increase the full employment, quantity of labour, and increase potential GDP  many economists recognize the power of tax cuts as incentives  they correctly argues that tax cuts would increase employment and increase output  but tax cuts without spending cuts would increase the budget deficit and cause serious problems Fiscal policy  used as a tool to stabilize the business cycle  fiscal policy actions work by changing the aggregate demand Discretionary Fiscal Policy  A change in a spending program or a tax law  A cut in income tax rates  It requires approval by the parliament Automatic Fiscal Policy  Fiscal action triggered by the state of the economy  An increase in unemployment induces and increase in payments to the unemployed  A fall in incomes triggers automatic decrease in tax revenues Fiscal Policy Multipliers  Government expenditure multiplier o =change in equilibrium income/change in gov. expenditures  A $50 billion increase in government expenditures increase equilibrium real GDP by $200 billion Change in equilibrium real GDP= (Gov. Expenditure multiplier) (change in G
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