{"id":96,"date":"2014-04-07T21:24:58","date_gmt":"2014-04-07T21:24:58","guid":{"rendered":"http:\/\/studentsagain.com\/home\/?p=96"},"modified":"2014-04-09T19:06:42","modified_gmt":"2014-04-09T19:06:42","slug":"fiscal-policy","status":"publish","type":"post","link":"http:\/\/studentsagain.com\/home\/business\/fiscal-policy\/","title":{"rendered":"Fiscal Policy"},"content":{"rendered":"

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I.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Legislative Mandates:<\/strong>\u00a0 Before the Great Depression, government may have affected the economy \u2013 maybe sometimes without knowledge it was doing so, but it certainly did not take it as it\u2019s purpose to fiddle with the economy.\u00a0 But the Great Depression and the rise of Keysian MacroEconomics changed that.\u00a0 Once government knew what it could do \u2013 and how\u2026it was just a matter of time before it decided it should.<\/p>\n

A.\u00a0\u00a0\u00a0\u00a0\u00a0 Employment Act of 1946 \u2013 required government to act to improve economic conditions where it could \u2013 including dealing with unemployment, inflation and using fiscal tools to attack these problems.<\/p>\n

B.\u00a0\u00a0\u00a0\u00a0\u00a0 CEA and JEC \u2013 economic advisory groups for the President (Committee of Economic Advisors) and Congress (Joint Economic Committee)<\/p>\n

II.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Fiscal Policy and the Aggregate Demand-Aggregate Supply Model<\/strong><\/p>\n

A.\u00a0\u00a0\u00a0\u00a0\u00a0 Expansionary Fiscal Policy: expansionary is a $.50 word for growing.\u00a0 The purpose of expansionary policy is to make the economy grow.\u00a0 Fiscal means that it has to do with tax and spending policy \u2013 i.e. the government budgetary process.\u00a0 Therefore, expansionary fiscal policy concerns making the economy grow by using tax and spending policy.<\/p>\n

–\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 budget deficits \u2013 expansionary fiscal policy is designed to spend more than the government takes in through taxes \u2013 so budget deficits are expected (and in fact by definition are required) to do expansionary fiscal policy.<\/p>\n

\"money<\/strong>1)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Increased Government Spending<\/p>\n

The first method or tool that government has at its disposal is government spending.\u00a0 This is the same government spending that we used to find AE and AgD.\u00a0 If we increase government spending, (G), we expect that AE will rise, and AgD will shift to the right.<\/p>\n

The graph below shows how when G increases (from G to G\u2019), the AE curve rises (from AE to AE\u2019) giving us a greater level of GDP (from GDP to GDP\u2019).\u00a0 At the same time, that means that the level of GDP must be rising in the AgD-AS graph too (there can be only one level of GDP at any one time).\u00a0 Inthe lower graph, AgD (which also depends on G) shifts in response to the increase in G.<\/p>\n

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2)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Tax Reductions<\/p>\n

Tax deductions work differently, but the graph looks almost identical.\u00a0 When a tax cut is given (ceteris peribus \u2013 i.e. no matching decrease in G), the effect is felt through changes in the disposable income of individual consumers and businesses.<\/p>\n

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Here the tax cut gives people more disposable income (YD<\/sub>), which can be spent or saved (a portion of which is spent if MPC > 0), that shifts AE up and increases GDP<\/p>\n

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Here the tax cut, increases the profit margin of businesses, making more investments profitable \u2013 leading to more investment, which shifts AE up and increases GDP<\/p>\n

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Another possibility that goes hand-in-hand with the first equation is that tax decreases mean people can save more too \u2013 lowering interest rates, making more investments profitable, increasing investment, which increases AE and GDP<\/p>\n

\"currency<\/strong>3)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Combined Tax Reductions and Increased Government Spending<\/p>\n

Doing both types of expansionary fiscal policy simultaneously increases GDP even faster \u2013 and creates deficits faster.<\/p>\n

B.\u00a0\u00a0\u00a0\u00a0\u00a0 Contractionary Fiscal Policy:\u00a0 Contractionary means to shrink.\u00a0 So Contractionary Fiscal policy is designed to shrink the economy (\u00af GDP).\u00a0 Why would you ever want to shrink GDP?\u00a0 We can see why in the AgD-AS graph.\u00a0 Look what happens to the level of PL as we shift from AgD\u2019 to AgD\u2019\u2019.\u00a0 The PL falls as GDP shrinks.\u00a0 That means that one way to defeat inflation is to create a recession (falling GDP).\u00a0 Have we ever done this?\u00a0 Yes, we have.<\/p>\n

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1)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Decreased Government Spending<\/p>\n

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A decrease in government spending causes the AE curve to shift down, leading to lower GDP and PL (decreases inflation)<\/p>\n

2)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Tax Increases<\/p>\n

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Increases in taxes leave less money in the hands of individuals (YD<\/sub>), so they spend less (\u2193C), and that causes AE to fall, creating less GDP.\u00a0 But the PL also falls.<\/p>\n

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Increases in corporate taxes causes profits to fall, decreasing the return on investment.\u00a0 Firms make fewer investments and AE falls, causing GDP to fall as well.\u00a0 But the PL also falls.<\/p>\n

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Increases in personal taxes also effects businesses, because people have less money in their hands (YD<\/sub>), so they save less, causing interest rates to rise, making it more expensive to invest, so firms invest less.\u00a0 AE falls, GDP decreases and so does the PL.<\/p>\n

3)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Combined Tax Increases and Decreased Government Spending: Obviously, combining both contractionary tools causes GDP to fall faster, and PL to decrease faster.\u00a0 It also creates surpluses by government raising taxes and cutting spending.<\/p>\n

C.\u00a0\u00a0\u00a0\u00a0\u00a0 Financing of Deficits and Disposing of Surpluses<\/p>\n

What do we do with the surpluses?\u00a0 Can we use them to pay off the debt?\u00a0 Generally, the answer is \u201cno\u201d.\u00a0 If we simply take that money and pay off debts by calling in government bonds, then money is injected into the system (Incomes rise).\u00a0 That would cause GDP to rise again \u2013 and PL with it.<\/p>\n

\"currency<\/strong>1)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Borrowing vs New Money<\/p>\n

–\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Borrowing from the Public: The government borrows from the public by issuing government bonds.\u00a0 When you buy a government bond, you\u2019ve lent the government your money – which they promise to pay back with interest.\u00a0 You are acting as a bank.\u00a0 The more they borrow from you, the less you have in cash, on hand.<\/p>\n

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It also does the same to businesses through consumers having less left to save:<\/p>\n

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–\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Money Creation: printing money seems like a painless way to pay debt \u2013 but when you print money to pay off government\u2019s bills, more money is in the hands of the public (which they can then spend).\u00a0 This causes C to rise \u2013 increasing AE and GDP.<\/p>\n

2)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Debt Retirement vs Idle Surplus<\/p>\n

–\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Debt Reduction<\/p>\n

–\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Idle Surplus<\/p>\n

D.\u00a0\u00a0\u00a0\u00a0\u00a0 Policy Options: G or T?<\/p>\n

III.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Built in Stability<\/strong><\/p>\n

A.\u00a0\u00a0\u00a0\u00a0\u00a0 Automatic Stabilizers<\/p>\n

B.\u00a0\u00a0\u00a0\u00a0\u00a0 Economic Importance<\/p>\n

C.\u00a0\u00a0\u00a0\u00a0\u00a0 Tax Progressivity<\/p>\n

–\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Progressive Tax system<\/p>\n

–\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Regressive Tax System<\/p>\n

–\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Proportional Tax System<\/p>\n

IV.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Evaluating Fiscal Policy<\/strong><\/p>\n

A.\u00a0\u00a0\u00a0\u00a0\u00a0 Full-Employment Budget<\/p>\n

B.\u00a0\u00a0\u00a0\u00a0\u00a0 Recent U.S. Fiscal Policy<\/p>\n

V.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Problems, Criticisms and Complications<\/strong><\/p>\n

A.\u00a0\u00a0\u00a0\u00a0\u00a0 Problems of Timing<\/p>\n

1)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Recognition Lag<\/p>\n

2)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Administrative Lag<\/p>\n

3)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Operational Lag<\/p>\n

B.\u00a0\u00a0\u00a0\u00a0\u00a0 Political Considerations<\/p>\n

– Political Business Cycles<\/p>\n

C.\u00a0\u00a0\u00a0\u00a0\u00a0 Future Policy Reversals<\/p>\n

D.\u00a0\u00a0\u00a0\u00a0\u00a0 Offsetting State and Local Finance<\/p>\n

E.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Crowding Out Effect<\/p>\n

F.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Graphical Presentation<\/p>\n

G.\u00a0\u00a0\u00a0\u00a0\u00a0 Criticisms of the Crowding Out Effect<\/p>\n

H.\u00a0\u00a0\u00a0\u00a0\u00a0 Fiscal Policy in the Open Economy<\/p>\n

1)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Shocks Originating from Abroad<\/p>\n

2)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Net Export Effect<\/p>\n

Photo by epSos.de<\/span><\/a> \"\"<\/a><\/small><\/p>\n

Photo by richardghawley<\/span><\/a> \"\"<\/a><\/small><\/p>\n

Photo by hsivonen<\/span><\/a> \"\"<\/a><\/small><\/p>\n

Photo by 401(K) 2013<\/span><\/a> \"\"<\/a><\/small><\/p>\n","protected":false},"excerpt":{"rendered":"

I. Legislative Mandates: Before the Great Depression, government may have affected the economy \u2013 maybe sometimes without knowledge it was doing so, but it certainly did not take it as it\u2019s purpose to fiddle with the economy. But the Great Depression and the rise of Keysian MacroEconomics changed that. Once government knew what it could do \u2013 and how\u2026it was just a matter of time before it decided it should.
Continue reading…<\/a><\/p>\n","protected":false},"author":1,"featured_media":120,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[53,54],"tags":[27,14,59,60,26,57,56,61,55,58],"class_list":["post-96","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business","category-macroeconomics","tag-act","tag-cause","tag-fiscal","tag-fiscal-policy","tag-future","tag-gdp","tag-government","tag-government-spending","tag-policy","tag-tax"],"yoast_head":"\nFiscal Policy | Students Again<\/title>\n<meta name=\"description\" content=\"I. Legislative Mandates: Before the Great Depression, government may have affected the economy \u2013 maybe sometimes without knowledge it was doing so, but it certainly did not take it as it\u2019s purpose to fiddle with the economy. But the Great Depression and the rise of Keysian MacroEconomics changed that. 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Once government knew what it could do \u2013 and how\u2026it was just a matter of time before it decided it should.","og_url":"https:\/\/studentsagain.com\/home\/business\/fiscal-policy\/","og_site_name":"Students Again","article_published_time":"2014-04-07T21:24:58+00:00","article_modified_time":"2014-04-09T19:06:42+00:00","og_image":[{"width":500,"height":280,"url":"https:\/\/studentsagain.com\/home\/wp-content\/uploads\/2014\/04\/8474532085_6d010ee8d0_currency.jpg","type":"image\/jpeg"}],"author":"students","twitter_misc":{"Written by":"students","Est. reading time":"5 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/studentsagain.com\/home\/business\/fiscal-policy\/#article","isPartOf":{"@id":"https:\/\/studentsagain.com\/home\/business\/fiscal-policy\/"},"author":{"name":"students","@id":"http:\/\/studentsagain.com\/home\/#\/schema\/person\/ffef62fb0dd57ba585f3200ff949470f"},"headline":"Fiscal Policy","datePublished":"2014-04-07T21:24:58+00:00","dateModified":"2014-04-09T19:06:42+00:00","mainEntityOfPage":{"@id":"https:\/\/studentsagain.com\/home\/business\/fiscal-policy\/"},"wordCount":1058,"image":{"@id":"https:\/\/studentsagain.com\/home\/business\/fiscal-policy\/#primaryimage"},"thumbnailUrl":"http:\/\/studentsagain.com\/home\/wp-content\/uploads\/2014\/04\/8474532085_6d010ee8d0_currency.jpg","keywords":["act","cause","fiscal","fiscal policy","future","GDP","government","government spending","policy","tax"],"articleSection":["Business","Macroeconomics"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/studentsagain.com\/home\/business\/fiscal-policy\/","url":"https:\/\/studentsagain.com\/home\/business\/fiscal-policy\/","name":"Fiscal Policy | Students Again","isPartOf":{"@id":"http:\/\/studentsagain.com\/home\/#website"},"primaryImageOfPage":{"@id":"https:\/\/studentsagain.com\/home\/business\/fiscal-policy\/#primaryimage"},"image":{"@id":"https:\/\/studentsagain.com\/home\/business\/fiscal-policy\/#primaryimage"},"thumbnailUrl":"http:\/\/studentsagain.com\/home\/wp-content\/uploads\/2014\/04\/8474532085_6d010ee8d0_currency.jpg","datePublished":"2014-04-07T21:24:58+00:00","dateModified":"2014-04-09T19:06:42+00:00","author":{"@id":"http:\/\/studentsagain.com\/home\/#\/schema\/person\/ffef62fb0dd57ba585f3200ff949470f"},"description":"I. Legislative Mandates: Before the Great Depression, government may have affected the economy \u2013 maybe sometimes without knowledge it was doing so, but it certainly did not take it as it\u2019s purpose to fiddle with the economy. But the Great Depression and the rise of Keysian MacroEconomics changed that. Once government knew what it could do \u2013 and how\u2026it was just a matter of time before it decided it should.","breadcrumb":{"@id":"https:\/\/studentsagain.com\/home\/business\/fiscal-policy\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/studentsagain.com\/home\/business\/fiscal-policy\/"]}]},{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/studentsagain.com\/home\/business\/fiscal-policy\/#primaryimage","url":"http:\/\/studentsagain.com\/home\/wp-content\/uploads\/2014\/04\/8474532085_6d010ee8d0_currency.jpg","contentUrl":"http:\/\/studentsagain.com\/home\/wp-content\/uploads\/2014\/04\/8474532085_6d010ee8d0_currency.jpg","width":500,"height":280},{"@type":"BreadcrumbList","@id":"https:\/\/studentsagain.com\/home\/business\/fiscal-policy\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"http:\/\/studentsagain.com\/home\/"},{"@type":"ListItem","position":2,"name":"Business","item":"https:\/\/studentsagain.com\/home\/category\/business\/"},{"@type":"ListItem","position":3,"name":"Macroeconomics","item":"https:\/\/studentsagain.com\/home\/category\/business\/macroeconomics\/"},{"@type":"ListItem","position":4,"name":"Fiscal Policy"}]},{"@type":"WebSite","@id":"http:\/\/studentsagain.com\/home\/#website","url":"http:\/\/studentsagain.com\/home\/","name":"Students Again","description":"From Application To Graduation","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"http:\/\/studentsagain.com\/home\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"http:\/\/studentsagain.com\/home\/#\/schema\/person\/ffef62fb0dd57ba585f3200ff949470f","name":"students"}]}},"_links":{"self":[{"href":"http:\/\/studentsagain.com\/home\/wp-json\/wp\/v2\/posts\/96","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/studentsagain.com\/home\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/studentsagain.com\/home\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/studentsagain.com\/home\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/studentsagain.com\/home\/wp-json\/wp\/v2\/comments?post=96"}],"version-history":[{"count":5,"href":"http:\/\/studentsagain.com\/home\/wp-json\/wp\/v2\/posts\/96\/revisions"}],"predecessor-version":[{"id":125,"href":"http:\/\/studentsagain.com\/home\/wp-json\/wp\/v2\/posts\/96\/revisions\/125"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/studentsagain.com\/home\/wp-json\/wp\/v2\/media\/120"}],"wp:attachment":[{"href":"http:\/\/studentsagain.com\/home\/wp-json\/wp\/v2\/media?parent=96"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/studentsagain.com\/home\/wp-json\/wp\/v2\/categories?post=96"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/studentsagain.com\/home\/wp-json\/wp\/v2\/tags?post=96"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}