Fiscal policy macroeconomics

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Automatic stabilizers
Structural features of government spending and taxation that reduce fluctuations in dispposable income and the consumption, over the business cycle
Discretionary fiscal policy
The deliberate manipulation of government purchases, taxation, and transfer payments to promote macroeconomic goals, such as full employment, price stability, and economic growth.
Simple tax multiplier
The ratio of change in real GDP demanded to the initial change in autonomous net taxes that brought it about the numerical value of the simple tax multiplier is MPC/(1-MPC)
Expansionary fiscal policy
An increases in government purchases, decrease in net taxes, or some combination of the two aimed at invading aggregate demand enough to to return the economy to its potential output thereby reducing unemployment; policy used to close a contractionary gap
Contractionary fiscal policy
A decrease in government purchases, increase in net taxes, or some combination of the two aimed at reducing aggregate demand enough to return the economy to potential output without worsening inflation; policy used to close an expansionary gap
Classical economists
A group of 18th to 19th century economists who believed that economic downturns were short run phenomena that corrected themselves through natural market forces; thus, they believed that economy was self correcting and needed no government intervention
The evolution of fiscal policy
Prior to 1930s, discretionary fiscal policy was seldom used as in an instrument of macroeconomic policy
1929- stock market crash
1930 and beyond- the Great Depression at its height, 25% off the working population of was unemployed
Although unemployment dropped, the invisible hand was no where to be found
– 1936- John Maynard Keynes the General theory of employment interest and money
Types of policy’s
1.Fiscal and 2.monetary policy (the fed controls)
3 developments of discretionary fiscal policy
1. With the convo my operating below its potential, the government needed to increase aggregate demand to bootstrap output and unemployment
2. WWII- lifted the US out of the depression
3. Employment act of 1946- gave the federal government responsibility for promoting full employment and price stability
Marshall plan
Plan to help reform countries after the effects of WWII
Overall impact of fiscal policy
Don’t worry about a balanced budget promote full employment and price stability
Golden age to stagflation
1960s golden age of Keynesian economics president Kennedy: proposed a federal budget deficit
President Johnson: cut taxes
1970s: stagflation. High unemployment high inflation resulting from a decrease in aggregate supply
1980s: -23% tax cut
– government spending (7.1% to 6.3%)
– the stimulus from the tax cut helped sustain a continued expansion during the 1980s– the longest peacetime expansion to that point in the nations;s history
– the national debt strongly increased
Automatic sttabilizers
Automatic stabilizers smooth out flotations in disposable income over the business cycle, there by stimulating aggregate demand during recessions and dampening aggregate demand during expansions
Progressive income tax
During economic expansion and recession
President Clinton:
1993 substantially increased taxes on high income households
1994 republican congress: Moore discipline on federal government
Economy recovered
Growing consumer spending, rising business optimism (tech), goal libation, and the bull market. ( 8.3% to 3.2%)
Categories: Macroeconomics