ECO-2013 Lecture 10: Chapter 12
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Chapter 12: fiscal policy, incentives, and secondary effects. Fiscal policy, borrowing, and the crowding-out effect: basic components of crowding-out, y = c + i + g + x. If the government (public sector) spends more, g rises: then, businesses, consumers, and foreigners (private sector) spend less; in other words, c, i, and x fall, net effect is zero or a small positive increase in y. First secondary effect: when the government spends more, it either needs to borrow more or raise taxes to fund that spending. If they borrow more, the demand for loanable funds increases which increases interest rate; when interest rates increase, consumers buy less and businesses invest less. If the government raises taxes, consumers and businesses have less income which causes c and i to fall. Fiscal policy, future taxes, and the new classical model: skim on your own. Supply-side effects of fiscal policy: when tax rates decrease, workers get to keep more of their income.
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For each of the following, place an X to indicate the component affected and an R (increase) or an L (decrease) to show whether the AD curve shifts Right or Left. Consider only the primary effect. Consumption (C), Investment (I), Government spending (G), and Net Exports (NE):
Factor |
C |
I |
G |
NE |
R or L |
Real interest rate decreases |
Ā | Ā | Ā | Ā | Ā |
Consumers and executives become more confident in the economic future |
Ā | Ā | Ā | Ā | Ā |
The stock market rises |
Ā | Ā | Ā | Ā | Ā |
China's economic growth slows |
Ā | Ā | Ā | Ā | Ā |
Congress increases spending in the current fiscal year |
Ā | Ā | Ā | Ā | Ā |
Tariffs are imposed by many countries to protect domestic employment |
Ā | Ā | Ā | Ā | Ā |
The US Import/Export bank eliminates guarantees for loans to foreign airlines to purchase Boeing aircraft |
Ā | Ā | Ā | Ā | Ā |
Congress enacts tax incentives for firms purchasing new equipment and facilities |
Ā | Ā | Ā | Ā | Ā |