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Chapter 11

Chapter 11 - Fiscal policy, deficits, surpluses, and debt

4 Pages
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Department
Economics
Course Code
ECN 204
Professor
Thomas Barbiero

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Chapter 11: Fiscal Policy, Deficits, Surpluses, and Debt
11.1 Fiscal Policy and the AD AS Model
Since 1945, fiscal policy has been one of the governments main stabilization policy
tools
active if changes in government spending or taxes are at the option of the
government
non-discretionary if independent of parliamentary action
Expansionary fiscal policy
Used when recession occurs
Options:
oIncreased government spending
oTax reductions
oCombined government spending and tax reductions
oMay create a budget deficit: the amount by which the expenditures of the
federal government exceed its revenues in any year
Contractionary fiscal policy
Used to combat demand-pull inflation
Options:
oDecreased government spending: only enough to over the inflationary GDP
gap
oIncreased taxes
oCombines government spending decreases and tax increases
oCan cause budget surplus: tax revenues in excess of government spending
Policy options: government or taxes?
Depends on political views about size of government
11.2 Built-in stability
Net tax revenues vary directly with GDP
oTaxes rise when GDP rises, and vice versa
oTransfer payments fall when GDP rises, and vice versa
Leads to automatic stabilization over the business cycle
Automatic or built-in stabilizers
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Description
Chapter 11: Fiscal Policy, Deficits, Surpluses, and Debt 11.1 Fiscal Policy and the AD AS Model Since 1945, fiscal policy has been one of the governments main stabilization policy tools active if changes in government spending or taxes are at the option of the government non-discretionary if independent of parliamentary action Expansionary fiscal policy Used when recession occurs Options: o Increased government spending o Tax reductions o Combined government spending and tax reductions o May create a budget deficit: the amount by which the expenditures of the federal government exceed its revenues in any year Contractionary fiscal policy Used to combat demand-pull inflation Options: o Decreased government spending: only enough to over the inflationary GDP gap o Increased taxes o Combines government spending decreases and tax increases o Can cause budget surplus: tax revenues in excess of government spending Policy options: government or taxes? Depends on political views about size of government 11.2 Built-in stability Net tax revenues vary directly with GDP o Taxes rise when GDP rises, and vice versa o Transfer payments fall when GDP rises, and vice versa Leads to automatic stabilization over the business cycle Automatic or built-in stabilizers www.notesolution.com
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