Changes in federal taxes and purchases Where does the government spend its money Federal Government Spending 2010 Fiscal Policy An Overview of Government Spending and Taxes The Federal Governments Share of Total Government Expenditures ID: 254586
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Slide1
Fiscal Policy
Changes in federal taxes and purchases Slide2
Where does the government spend its money?
Federal Government
Spending, 2010Slide3
Fiscal Policy
An Overview of Government Spending and Taxes
The Federal Government’s Share of Total Government Expenditures,
1929–2009Slide4
Fiscal Policy
An Overview of Government Spending and Taxes
Federal Purchases and Federal Expenditures as a Percentage of GDP,
1950–2010Slide5
Where does the government get its money?
Federal Government Revenue,
2010Slide6Slide7
Laffer Curve (not in the book): there is optimal amount of taxation
Tax
Government revenueSlide8
Government spending/taxes and aggregate demandSlide9
The Effects of Fiscal Policy
on Real GDP and the Price Level
Expansionary and
Contractionary
Fiscal Policy: An Initial LookSlide10
Using Fiscal Policy to Influence Aggregate Demand:
A More Complete Account
An Expansionary Fiscal PolicySlide11
Using Fiscal Policy to Influence Aggregate Demand:
A More Complete Account
A
Contractionary
Fiscal PolicySlide12
A Summary of How Fiscal Policy Affects Aggregate Demand
Countercyclical Fiscal Policy
PROBLEM
TYPE OF POLICY
ACTIONS BY CONGRESS AND THE PRESIDENT
RESULT
Recession
Expansionary
Increase government
spending or cut taxes
Real GDP and the price level rise.
Rising Inflation
Contractionary
Decrease government
spending or raise taxes
Real GDP and the price level fall.
Don’t Let This Happen to
YOU!
Don’t Confuse Fiscal Policy and Monetary PolicySlide13
Multiplier (again)Slide14
The Government Purchases and Aggregate Demand
The Multiplier Effect and Aggregate DemandSlide15
Taking into Account the Effects of Aggregate Supply
The Multiplier Effect
and Aggregate SupplySlide16
The Government Purchases and Tax Multipliers
The Multiplier Effect
of an Increase in Government PurchasesSlide17
The Government Purchases and Tax Multipliers
The ratio of the change in equilibrium real GDP to the initial change in government purchases is known as the
government purchases multiplier
:
The expression for
the
tax multiplier is:Slide18
A cut in tax rates affects equilibrium real GDP through two channels:
A cut in tax rates increases the disposable income of households, which leads them to increase their consumption spending, and
a cut in tax rates increases the size of the multiplier effect. Slide19
Decrease and increases in government expenditure are multiplied
Decrease and increase in taxes are multiplied
The Multipliers Work in Both DirectionsSlide20
Solved
Problem
Fiscal Policy Multipliers
Briefly explain whether you agree or disagree with the following statement: “Real GDP is currently $12.2 trillion, and potential real GDP is $12.5 trillion. If Congress and the president would increase government purchases by $300 billion or cut taxes by $300 billion, the economy could be brought to equilibrium at potential GDP.”Slide21
Crowding out
A decline in private expenditures as a result of an increase in government purchases.Slide22
Crowding out limits Fiscal Policy in the short run.
Crowding Out in the Money Market
An Expansionary Fiscal Policy Increases Interest RatesSlide23
In the long run, the economy returns to potential GDP
.
Crowding Out in the Aggregate Demand and Aggregate Supply DiagramSlide24
Budget Deficit
Budget deficit
The situation in which the government’s expenditures are greater than its tax revenue.
Budget surplus
The situation in which the government’s expenditures are less than its tax revenue.Slide25
Deficits, Surpluses, and Federal Government Debt
The Federal Budget Deficit,
1901–2009Slide26
Solved
Problem
The Effect of Economic Fluctuations on the Budget Deficit
The federal government’s budget deficit was $207.8 billion in 1983 and $185.4 billion in 1984. A student comments, “The government must have acted during 1984 to raise taxes or cut spending or both.”
Do you agree? Briefly explain.Slide27
Cyclically adjusted budget deficit or
surplus:
The deficit or surplus in the federal government’s budget if the economy were at potential GDP.
Deficits, Surpluses, and Federal Government Debt
How the Federal Budget Can Serve as an Automatic StabilizerSlide28
Debt can be a problem for a government for the same reasons that debt can be a problem for a household or a business.
Deficits, Surpluses, and Federal Government Debt
Is Government Debt a Problem?Slide29
Although many economists believe that it is a good idea for the federal government to have a balanced budget when the economy is at potential GDP, few economists believe that the federal government should attempt to balance its budget every year.
Deficits, Surpluses, and Federal Government Debt
Should the Federal Budget Always Be Balanced?Slide30
Did Fiscal Policy Fail during
the Great Depression?
Making
the
Connection
Although government spending increased during the Great Depression, the cyclically adjusted budget was in surplus most years.
FEDERAL GOVERNMENT EXPENDITURES (BILLIONS OF DOLLARS
ACTUALFEDERAL BUDGET DEFICIT OR SURPLUS (BILLIONS OF DOLLARS)
CYCLICALLY ADJUSTED BUDGET DEFICIT OR SURPLUS (BILLIONS OF DOLLARS)
CYCLICALLY ADJUSTED BUDGET DEFICIT OR SURPLUS AS A PERCENTAGE OF GDP
1929
$2.6
$1.0
$1.24
1.20%
1930
2.7
0.2
0.81
0.89
1931
4.0
-2.1
-0.41
-0.54
1932
3.0
-1.3
0.50
0.85
1933
3.4
-0.9
1.06
1.88
1934
5.5
-2.2
0.09
0.14
1935
5.6
-1.9
0.54
0.74
1936
7.8
-3.2
0.47
0.56
1937
6.4
0.2
2.55
2.77
1938
7.3
-1.3
2.47
2.87
1939
8.4
-2.1
2.00
2.17Slide31
Tax wedge
The difference between the pretax and posttax return to an economic activity.
The Effects of Fiscal Policy in the Long Run
The Long-Run Effects of Tax Policy
• Individual income tax.
• Corporate income tax.
• Taxes on dividends and capital gains.
We can look briefly at the effects on aggregate supply of cutting each of the following taxes:
In addition to the potential gains from cutting individual taxes, there are also gains from tax simplification.
Tax SimplificationSlide32
The Effects of Fiscal Policy in the Long Run
The Economic Effect of Tax Reform
The Supply-Side Effects of a Tax ChangeSlide33
Most economists would agree that there are supply-side effects to reducing taxes: Decreasing marginal income tax rates will increase the quantity of labor supplied, cutting the corporate income tax will increase investment spending, and so on.
The magnitude of the effects is subject to considerable debate, however.
The Effects of Fiscal Policy in the Long Run
How Large Are Supply-Side Effects?