Copyright © 2006 Pearson Education Canada Fiscal Policy 24 CHAPTER.

Slides:



Advertisements
Similar presentations
1 CHAPTER.
Advertisements

27 CHAPTER Aggregate Supply and Aggregate Demand.
The Federal Budget The federal budget is the annual statement of the federal government’s outlays and tax revenues. The federal budget has two purposes:
Fiscal Policy CHAPTER 16 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Describe the federal.
13 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL CHAPTER.
Fiscal Policy Lecture notes 10 Instructor: MELTEM INCE
Aggregate Expenditure CHAPTER 30 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Distinguish.
1 Chapter 21 Fiscal Policy Key Concepts Key Concepts Summary Practice Quiz Internet Exercises Internet Exercises ©2002 South-Western College Publishing.
Lesson 12-1 Fiscal Policy.
FISCAL POLICY 31 CHAPTER. Objectives After studying this chapter, you will able to  Describe the federal budget process and the recent history of expenditures,
Fiscal Policy Recall: Fiscal Policy- government’s choices regarding spending and taxes. Defn:The federal budget is an annual statement of the revenues,
Fiscal and Monetary Policy Effects CHAPTER 31 When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T.
Fiscal Policy CHAPTER 32 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Describe the federal.
Fiscal and Monetary Policy Effects CHAPTER 16 When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T.
Fiscal Policy-Modules 20/21
© 2010 Pearson Education Canada. A voice can be a whisper or fill Toronto’s Molson Amphitheatre, depending on the amplification. A limousine with good.
22 Aggregate Supply and Aggregate Demand
© 2010 Pearson Education Canada. Production grows and prices rise, but the pace is uneven. What forces bring persistent and rapid expansion of real.
Understanding Economics
28 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL © 2012 Pearson Addison-Wesley.
© 2010 Pearson Education CHAPTER 1. © 2010 Pearson Education.
CH. 15: FISCAL POLICY Federal budget process and the recent history of expenditures, taxes, deficits, and debt Supply-side effects of fiscal policy on.
Copyright © 2006 Pearson Education Canada Expenditure Multipliers PART 8Aggregate Demand and Inflation 23 CHAPTER.
Ch. 14: Fiscal Policy Federal budget process and recent history of outlays, tax revenues, deficits, and debts Supply-Side Economics Controversies on effects.
To view a full-screen figure during a class, click the red “expand” button.
AGGREGATE SUPPLY AND AGGREGATE DEMAND
© 2010 Pearson Education CHAPTER 1. © 2010 Pearson Education.
Fiscal Policy Changes in federal taxes and purchases.
Fiscal Policy Chapter 12 Copyright © 2011 by The McGraw-Hill Companies, Inc. All Rights Reserved.McGraw-Hill/Irwin.
13 FISCAL POLICY © 2014 Pearson Addison-Wesley After studying this chapter, you will be able to:  Describe the federal budget process and the recent.
11 FISCAL POLICY CHAPTER.
Chapter 10: Fiscal Policy
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1 Chapter 21 Fiscal Policy Key Concepts Key Concepts Summary Practice Quiz Internet Exercises Internet Exercises ©2002 South-Western College Publishing.
GDP in an Open Economy with Government Chapter 17
© 2013 Pearson EYE Ons 30 Aggregate Expenditure Multiplier.
13 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL CHAPTER.
Copyright © 2010 Pearson Education Canada. A voice can be a whisper or fill Toronto’s Molson Amphitheatre, depending on the amplification. A limousine.
Copyright © 2010 Pearson Education Canada. In 2007, the federal government spent 15 cents of each dollar Canadians earned and collected 16 cents of.
11 EXPENDITURE MULTIPLIERS © 2014 Pearson Addison-Wesley After studying this chapter, you will be able to:  Explain how expenditure plans are determined.
When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Provide a technical definition of recession and.
Fiscal Policy and Monetary Policy CHAPTER 19 When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T.
Chapter 16: FISCAL POLICY
AS - AD and the Business Cycle CHAPTER 13 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Provide.
Copyright © 2010 Pearson Education Canada. Production grows and prices rise, but the pace is uneven. What forces bring persistent and rapid expansion.
The Multiplier The Multiplier and the Marginal Propensities to Consume and Save Ignoring imports and income taxes, the marginal propensity to consume determines.
© 2011 Pearson Education Aggregate Supply and Aggregate Demand 13 When you have completed your study of this chapter, you will be able to 1 Define and.
1 Chapter 13 Lecture – FISCAL POLICY. 2 The Federal Budget The federal budget is the annual statement of the federal government’s outlays and tax revenues.
Expenditure Multipliers: The Keynesian Model CHAPTER 12.
Chapter 10 Lecture - Aggregate Supply and Aggregate Demand.
Objectives After studying this chapter, you will able to  Explain what determines aggregate supply  Explain what determines aggregate demand  Explain.
Aggregate Expenditure CHAPTER 30 When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Distinguish.
When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Describe the federal budget process and explain.
10 AGGREGATE SUPPLY AND AGGREGATE DEMAND © 2014 Pearson Addison-Wesley After studying this chapter, you will be able to:  Explain what determines aggregate.
30 FISCAL POLICY © 2012 Pearson Education In 2010, the federal government planned to collect taxes of 16 cents on each dollar Americans earned and spend.
Fiscal Policy Changes in federal taxes and purchases.
AS - AD and the Business Cycle CHAPTER 19 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Provide.
Expenditure Multipliers: The Keynesian Model CHAPTER 12.
CHAPTER OUTLINE 13 The AD /AS Model Dr. Neri’s Expanded Discussion of AD / AS Fiscal Policy Fiscal Policy Effects in the Long Run Monetary Policy Shocks.
Fiscal Policy and Monetary Policy CHAPTER 20 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to.
When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Describe the federal budget process and explain.
7 AGGREGATE DEMAND AND AGGREGATE SUPPLY CHAPTER.
Copyright © 2005 Pearson Education Canada Inc.11-1 Chapter 11 Fiscal Policy and the Public Debt.
Fiscal Policy CHAPTER 14. After studying this chapter you will be able to Describe the federal budget process and the recent history of outlays, tax revenues,
1 FINA 353 Principles of Macroeconomics Lecture 9 Topic: Fiscal Policy FINA 353 Principles of Macroeconomics Lecture 9 Topic: Fiscal Policy Dr. Mazharul.
When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Distinguish between autonomous expenditure and.
Economics 202 Principles Of Macroeconomics
Fiscal Policy How the government uses discretionary fiscal policy to influence the economies performance.
13 FISCAL POLICY. 13 FISCAL POLICY After studying this chapter, you will be able to: Describe the federal budget process and the recent history of.
Presentation transcript:

Copyright © 2006 Pearson Education Canada Fiscal Policy 24 CHAPTER

Copyright © 2006 Pearson Education Canada Objectives After studying this chapter, you will able to  Describe how federal and provincial budgets are created and describe their recent history  Distinguish between automatic and discretionary fiscal policy and define and explain the fiscal policy multipliers  Explain the effects of fiscal policy in both the short run and the long run  Distinguish between and explain the demand-side and supply-side effects of fiscal policy 2

Copyright © 2006 Pearson Education Canada Balancing Acts on Parliament Hill In 2004, the federal government spent 15.5 cents out of each dollar earned in Canada, and collected 16 cents per dollar in taxes. How does that affect the economy? For most of the 1980s and 1990s, the government had large deficits and ran up a debt, but spending cuts and surpluses in the late 1990s, national debt in 2004 was $16,500 per person. How do government deficits and debt affect the economy?

Copyright © 2006 Pearson Education Canada Government Budgets The federal budget is the annual statement of the federal government’s expenditures and tax revenues. A provincial budget is the annual statement of a provincial government’s expenditures and tax revenues. Fiscal policy is the use of the federal budget to achieve macroeconomic objectives, such as full employment, sustained long-term economic growth, and price level stability.

Copyright © 2006 Pearson Education Canada Government Budgets Budget Making The federal government and Parliament make fiscal policy. The budget process begins with long drawn-out meetings between the Minister of Finance, Department of Finance officials, provincial government, business, labour, and consumer groups. A budget plan is presented to Parliament, which Parliament eventually approves and passes.

Copyright © 2006 Pearson Education Canada Government Budgets Highlights of the 2005 Budget The projected fiscal 2005 Federal Budget has revenues of $200 billion, expenditures of $196 billion, and a projected surplus of $4 billion. Revenues come from personal income taxes, corporate income taxes, indirect taxes, and investment income. Personal income taxes are the largest revenue source. Expenditures are transfer payments, expenditures on goods and services, and debt interest. Transfer payments are the largest expenditure item.

Copyright © 2006 Pearson Education Canada Government Budgets The federal government’s budget balance equals tax revenue minus expenditure. If revenues exceed outlays, the government has a budget surplus. If outlays exceed revenues, the government has a budget deficit. If revenues equal outlays, the government has a balanced budget. The projected budget surplus in 2005 is $4 billion.

Copyright © 2006 Pearson Education Canada Government Budgets The Budget in Historical Perspective Figure 24.1 on the next slide shows the government’s tax revenues, expenditures, and budget surplus or deficit as a percentage of GDP for the period 1960–2004. The government deficit peaked at 8.6 percent of GDP in The deficit declined and after 1997, the government had a budget surplus.

Copyright © 2006 Pearson Education Canada Government Budgets

Copyright © 2006 Pearson Education Canada Government Budgets Figure 24.2 shows revenues as a percentage of GDP. Revenues from personal income taxes fluctuated the most. They increased in the 1960s and early 1970s, decreased in late 1970s, increased in the 1980s and 1990s, and decreased in the 2000s. Revenues

Copyright © 2006 Pearson Education Canada

Government Budgets Figure 24.3 shows outlays as a percentage of GDP. Transfer payments increased from 1965 to 1990 but decreased sharply in the 1990s. Debt interest increased in the 1980s as the budget deficit fed on itself but decreased in the late 1990s as surpluses lowered government debt. Outlays

Copyright © 2006 Pearson Education Canada

Government Budgets Government debt is the total amount that the government borrowing. It is the sum of past deficits minus past surpluses. Figure 24.4 shows the government debt as a percentage of GDP increased during World War II, decreased through 1974, increased through 1997, then decreased. Deficit and Debt

Copyright © 2006 Pearson Education Canada

Government Budgets Provincial and Local Government Budgets Figure 24.5(a) shows the range of variation in the size of the provincial budgets as percentages of provincial GDP. They range from Nunavut at more then 90 percent to Alberta and Ontario at less than 20 percent.

Copyright © 2006 Pearson Education Canada

Government Budgets Figure 24.5(b) shows that the provinces don’t raise all their own revenues from provincial taxes. Nunavut gets most of its revenue from Ottawa while Alberta and Ontario get more than 90 percent of their revenue from their own taxes.

Copyright © 2006 Pearson Education Canada

Government Budgets Figure 24.6 shows the history of government budgets since Total government is the sum of federal, provincial, and local governments. Both the federal and total governments had deficits during most years since And both moved into surplus in the late 1990s.

Copyright © 2006 Pearson Education Canada

Government Budgets The Canadian Government Budget in Global Perspective Figure 24.7 compares government budget deficits around the world in Governments in most countries had budget deficits in A few governments have budget surpluses.

Copyright © 2006 Pearson Education Canada

Fiscal Policy Multipliers Automatic fiscal policy is a change in fiscal policy triggered by the state of the economy. Discretionary fiscal policy is a policy action that is initiated by an act of Parliament. To enable us to focus on the principles of fiscal policy multipliers, we first study discretionary fiscal policy in a model economy that has only autonomous taxes. Autonomous taxes are taxes that do not vary with real GDP.

Copyright © 2006 Pearson Education Canada Fiscal Policy Multipliers The Government Expenditures Multiplier The government expenditures multiplier is the magnification effect of a change in government expenditures on goods and services on equilibrium aggregate expenditure and real GDP. A multiplier exists because government expenditures are a component of aggregate expenditure; an increase in government expenditures increases aggregate income, which induces additional consumption expenditure.

Copyright © 2006 Pearson Education Canada Fiscal Policy Multipliers Figure 24.8 illustrates the government expenditures multiplier in the aggregate expenditure diagram. The government expenditures multiplier is 1/(1 – Slope of AE curve). When the slope of the AE curve is 0.75, the multiplier is 4.

Copyright © 2006 Pearson Education Canada

Fiscal Policy Multipliers The Autonomous Tax Multiplier The autonomous tax multiplier is the magnification effect a change in autonomous taxes on equilibrium aggregate expenditure and real GDP. An increase in autonomous taxes decreases disposable income, which decreases consumption expenditure and decreases aggregate expenditure and real GDP.

Copyright © 2006 Pearson Education Canada Fiscal Policy Multipliers The amount by which a tax increase lowers consumption expenditure is determined by the MPC. $1 tax increases lowers consumption expenditure by $1  MPC, and this amount gets multiplied by the standard autonomous expenditures multiplier. The autonomous tax multiplier is –MPC/(1 – Slope of AE curve). It is negative because an increase in autonomous taxes decreases equilibrium expenditure.

Copyright © 2006 Pearson Education Canada Fiscal Policy Multipliers Figure 24.9 illustrates the effect of an increase in autonomous taxes. The autonomous transfer payments multiplier and the autonomous tax multiplier are the same except for their signs—the transfer payments multiplier is positive.

Copyright © 2006 Pearson Education Canada

Fiscal Policy Multipliers Induced Taxes and Transfer Payments Taxes that vary with real GDP are called induced taxes. Most transfer payments also vary with real GDP. During a recession, induced taxes fall and transfer payments rise; and during an expansion, induced taxes rise and transfer payments fall. Both effects diminish the size of the government expenditures and autonomous tax multipliers.

Copyright © 2006 Pearson Education Canada Fiscal Policy Multipliers The extent to which induced taxes and transfer payments decrease the multiplier depends on the marginal tax rate, which is the fraction of an additional dollar of real GDP that flows to the government in net taxes. The higher the marginal tax rate, the larger is the fraction of an additional dollar of income that flows to the government and the smaller is the induced change in consumption expenditure. The smaller the induced change in consumption expenditure the smaller are the government expenditures and autonomous tax multipliers.

Copyright © 2006 Pearson Education Canada Fiscal Policy Multipliers International Trade and Fiscal Policy Multipliers Imports decrease the fiscal policy multipliers. The larger the marginal propensity to import, the smaller is the magnitude of the government expenditures and autonomous tax multipliers.

Copyright © 2006 Pearson Education Canada Fiscal Policy Multipliers Automatic Stabilizers Automatic stabilizers are mechanisms that stabilize real GDP without explicit action by the government. Income taxes and transfer payments are automatic stabilizers. Because income taxes and transfer payments change with the business cycle, the government’s budget deficit also varies with this cycle. In a recession, taxes fall, transfer payments rise, and the deficit grows; in an expansion, taxes rise, transfers fall, and deficit shrinks.

Copyright © 2006 Pearson Education Canada Fiscal Policy Multipliers Figure shows the budget deficit over the business cycle from 1980 to Recessions are highlighted. Budget Deficit Over the Cycle

Copyright © 2006 Pearson Education Canada

Fiscal Policy Multipliers Cyclical and Structural Balances The structural surplus or deficit is the surplus or deficit that would occur if the economy were at full employment and real GDP were equal to potential GDP. The cyclical surplus or deficit is the actual surplus or deficit minus the structural surplus or deficit; that is, it is the surplus or deficit that occurs purely because real GDP does not equal potential GDP.

Copyright © 2006 Pearson Education Canada Fiscal Policy Multipliers Figure illustrates the distinction between a structural and cyclical surplus and deficit. In part (a), as real GDP fluctuates around potential GDP, a cyclical deficit or surplus arises.

Copyright © 2006 Pearson Education Canada

In part (b), if real GDP and potential GDP are $900 billion, there is a structural deficit. If real GDP and potential GDP are $1,000 billion, the budget is balanced. If real GDP and potential GDP are $1,100 billion, there is a structural surplus. Fiscal Policy Multipliers

Copyright © 2006 Pearson Education Canada

Fiscal Policy Multipliers and the Price Level Fiscal Policy and Aggregate Demand Figure illustrates the effects of fiscal policy on aggregate demand. An increase in government expenditures shifts the AE curve upward …

Copyright © 2006 Pearson Education Canada

Fiscal Policy Multipliers and the Price Level … and shifts the AD curve rightward. The magnitude of the shift in the AD curve equals the government expenditures multiplier times the increase in government expenditures. (A cut in autonomous taxes has a similar effect.)

Copyright © 2006 Pearson Education Canada

Fiscal Policy Multipliers and the Price Level Expansionary fiscal policy, an increase in government expenditures or a decrease in tax revenues, shifts the AD curve rightward. Contractionary fiscal policy, a decrease in government expenditures or an increase in tax revenues, shifts the AD curve leftward.

Copyright © 2006 Pearson Education Canada Fiscal Policy Multipliers and the Price Level Figure 24.13(a) illustrates the effect of an expansionary fiscal policy on real GDP and the price level when real GDP is below potential GDP. The rightward shift in the AD curve equals the multiplied increase in aggregate expenditure.

Copyright © 2006 Pearson Education Canada Fiscal Policy Multipliers and the Price Level The increase in GDP is less than the multiplied increase in aggregate expenditure because the price level rises.

Copyright © 2006 Pearson Education Canada

Fiscal Policy Multipliers and the Price Level Fiscal Expansion at Potential GDP Figure 24.13(b) illustrates the effects of an expansionary fiscal policy at full employment.

Copyright © 2006 Pearson Education Canada Fiscal Policy Multipliers and the Price Level An inflationary gap exists and the money wage rate starts to rise. The SAS curve shifts leftward and the price level rises. In the long run, fiscal policy multipliers are zero because real GDP equals potential GDP.

Copyright © 2006 Pearson Education Canada

Fiscal Policy Multipliers and the Price Level Limitations of Fiscal Policy Because the fiscal policy multipliers in the short run are not zero, fiscal policy can be used to help stabilize the economy. But in practice, fiscal policy is hard to use because:  The legislative process is too slow to permit policy actions to be implemented when they are needed  Potential GDP is hard to estimate, so too much fiscal stimulation might be applied too close to full employment

Copyright © 2006 Pearson Education Canada Supply-Side Effects of Fiscal Policy Fiscal Policy and Potential GDP Potential GDP depends on the full-employment quantity of labour, which in turn is influenced by taxes. Figure 24.14(a) illustrates the effects of taxes in the labour market.

Copyright © 2006 Pearson Education Canada Supply-Side Effects of Fiscal Policy The income tax decreases the supply of labour because the tax decreases the after-tax wage rate. The before-tax real wage rate rise but the after-tax real wage rate falls.

Copyright © 2006 Pearson Education Canada Supply-Side Effects of Fiscal Policy The quantity of labour employed decreases. Potential GDP decreases. This supply-side effect of the income tax means that a cut in the income tax rate increases potential GDP and increases aggregate supply.

Copyright © 2006 Pearson Education Canada

Supply-Side Effects of Fiscal Policy Figure 24.14(b) illustrates the effect of the income tax in the capital market. The income tax decreases the supply of capital because it decreases the after-tax interest rate.

Copyright © 2006 Pearson Education Canada Supply-Side Effects of Fiscal Policy Because the income tax decreases the supply of capital, it raises the equilibrium interest rate, decreases capital, and decreases potential GDP. This supply-side effect of the income tax means that a cut in the income tax rate increases potential GDP and increases aggregate supply.

Copyright © 2006 Pearson Education Canada

Supply-Side Effects of Fiscal Policy Supply Effects and Demand Effect Figure illustrates two views about the effects of a tax cut on real GDP and the price level. A tax cut increases aggregate demand and the AD curve shifts rightward.

Copyright © 2006 Pearson Education Canada

Supply-Side Effects of Fiscal Policy Most economists believe that a tax cut has a small effect on aggregate supply. So GDP increases and the price level rises.

Copyright © 2006 Pearson Education Canada

Supply-Side Effects of Fiscal Policy Supply-side economists think that a tax cut increases aggregate supply by a large amount so that GDP increases and the price level does not change (or might even fall).

Copyright © 2006 Pearson Education Canada