MacroeconomicsTest 4
Terms
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- when Congress inacts fical policy, it means they will...
- tax (t) and or Spend
- Who likes fical policy?
- Keyensian economists
- why don't classical economists like fical policy?
- Because they believe in laissez faire
- 2 types of fical policy
- discretionary and nondiscretionary
- discretionary
- (congress takes action).. contractionary and expantionary
- contractionary
- used in times of demand-pull inflation (raise taxes or decrease spending or a combination of both)
- expansionary
- used in time of recession...decrease taxes, increase G or both
- Nondiscretionary fiscal policy
- (automatic stablisers in economic which help fight inflation and recession w/o new laws)Progressive tax system and unemployment compensation
- progressive tax system
- the more you have the more you are taxed... as income rises, we are taxed at a higher amount.. helps to restrain spenidng (automatically)
- What happens to tax revenues when economy grows?
- the gov collects more (happens automatically).. taxes go up because income goes up
- which is worse: a decline in GDP deficit or a deficit that results from expansionary fiscal policy
- GDP deficit because it is less easy to control
- Deficit
- when tax revenues are greater than spending
- planned deficit
- debt from spending more than we recieve to rescue us from a recession
- Timing problems with Fiscal policy
-
1) recognition (it takes time for ppl to realize whats going on)
2)administrative lag (develope bill, debate, and pass)
3) operational lag (takes a while to work) - Political business cycle
- What happens during an election is that congress will make the conomy better becasue they want ppl to vote from them. During this period, congress spends more and taxes less
- How do state and local politics affect fical policy
- although the federal gov might be expansionary, the state has its own budgit, so they might be in a contractionary
- Crowding out (defintion)
- when the gov inacts expansionary fiscal policy, frequently it must borrow that money to build. When it borrows, it is so big that it can "crowd out" provate investment/private borrowing
- When does crowding out occur?
- w/ expansionary fiscal policy thus the gov is increasing spending, decreasing taxes or both
- why is this bad?
- federal gov tends towards a deficit (borrow more than we have)
- what happens when the gov borrows money?
- there is an increase in the deman for money
- what happens with the increase demand of money
- causes interest rates to rise which means compnays cant invest (lowers investment..Ig) because firms get "broweded out by gov.
- See graph in notes
- see graph in notes
- In general, expantionary fiscal policy leads to..
- a rise in interest rates.
- when is borrowing bad?
- when we borrow for unwise (shortsighted) spending
- Net Export Effect
-
(everything the same as crowding out)
-occurs w/ expansionary fical policy
-gov increases spending or decreases taxes
-budgit tendds toward deficit
-gov borrows to finance or cover deficit (when gov borrows this increases the demand for money which causes interest rates to rise)
**diference from crowding out
-"Foriegn Capital $ chase high interest rates" - -"Foriegn Capital $ chase high interest rates"
- foriegn bankers want to get back high interest rates so they borrow from countrys with those high interest rates. To loan to ppl/business/gov they need that currency (ex US dollars) so the deman for US currency goes up and the foriegn exchange market goes up (the price of the dollar goes up) a higher price on the dollar means a decrease in exports because US goods and services cost more. If they cost more then means a decline in AD and GDP.
- Thus... expansionary fiscal policy...
-
increases the value of the $ to increase interest rates.
fyi when we dont borrow the value goes down - ***Note
- Always assume fiscal policy changes AD unless you are told otherwise
- Supply sider economists
- they believe lower tax rates shift AS to the right (this is because when business taxes are reduced, the wealthy can afford to invest more in research and development and productivity
- decrease personal income taxes (still supply siders)
- incentive to work harder b/c you can keep more income (increase in productivity leads to increase in aggregate supply)
- Trickle Down Theory
- tax cuts for wealthy means an increase in business opportunity
- lower tax rates
- will increase tax revenue because of economic growth..the more money for people to spend which means economy growth because ppl will spend more