© 2007 Prentice Hall Business Publishing; Essentials of Economics, R. Glenn Hubbard, Anthony Patrick O’Brien CHAPTER 17: Fiscal Policy 1 of 32 Fiscal Policy Fiscal policy: Changes in federal taxes and government purchases that are intended to achieve macroeconomic policy objectives, such as high employment, price stability, and high rates of economic growth. What Fiscal Policy Is and What It Isn’t Automatic Stabilizers versus Discretionary Fiscal Policy Automatic stabilizers: Government spending and taxes that automatically increase or decrease along with the business cycle.

© 2007 Prentice Hall Business Publishing; Essentials of Economics, R. Glenn Hubbard, Anthony Patrick O’Brien CHAPTER 17: Fiscal Policy 2 of 32 Fiscal Policy An Overview of Government Spending and Taxes Federal Government Expenditures, 2004

© 2007 Prentice Hall Business Publishing; Essentials of Economics, R. Glenn Hubbard, Anthony Patrick O’Brien CHAPTER 17: Fiscal Policy 3 of 32 Fiscal Policy Federal Purchases and Federal Expenditures as a Percentage of GDP, An Overview of Government Spending and Taxes

© 2007 Prentice Hall Business Publishing; Essentials of Economics, R. Glenn Hubbard, Anthony Patrick O’Brien CHAPTER 17: Fiscal Policy 4 of 32 Fiscal Policy An Overview of Government Revenue

© 2007 Prentice Hall Business Publishing; Essentials of Economics, R. Glenn Hubbard, Anthony Patrick O’Brien CHAPTER 17: Fiscal Policy 5 of 32 Using Fiscal Policy to Influence Aggregate Demand A Summary of How Fiscal Policy Affects Aggregate Demand PROBLEMTYPE OF POLICY ACTIONS BY CONGRESS AND THE PRESIDENTRESULT RecessionExpansionaryIncrease government spending or cut taxes Real GDP and the price level rise Rising Inflation ContractionaryDecrease government spending or raise taxes Real GDP and the price level fall Countercyclical Fiscal Policy Don’t Confuse Fiscal Policy and Monetary Policy

© 2007 Prentice Hall Business Publishing; Essentials of Economics, R. Glenn Hubbard, Anthony Patrick O’Brien CHAPTER 17: Fiscal Policy 6 of 32 Using Fiscal Policy to Influence Aggregate Demand Expansionary Fiscal Policy

© 2007 Prentice Hall Business Publishing; Essentials of Economics, R. Glenn Hubbard, Anthony Patrick O’Brien CHAPTER 17: Fiscal Policy 7 of 32 Using Fiscal Policy to Influence Aggregate Demand Contractionary Fiscal Policy

© 2007 Prentice Hall Business Publishing; Essentials of Economics, R. Glenn Hubbard, Anthony Patrick O’Brien CHAPTER 17: Fiscal Policy 8 of 32 The Government Purchases and Tax Multipliers The Multiplier Effect and Aggregate Demand Multiplier effect: The series of induced increases in consumption spending that results from an initial increase in autonomous expenditures.

© 2007 Prentice Hall Business Publishing; Essentials of Economics, R. Glenn Hubbard, Anthony Patrick O’Brien CHAPTER 17: Fiscal Policy 9 of 32 The Limits of Using Fiscal Policy to Stabilize the Economy Does Government Spending Reduce Private Spending? Crowding out: A decline in private expenditures as a result of an increase in government purchases.

© 2007 Prentice Hall Business Publishing; Essentials of Economics, R. Glenn Hubbard, Anthony Patrick O’Brien CHAPTER 17: Fiscal Policy 10 of 32 The Limits of Using Fiscal Policy to Stabilize the Economy An Expansionary Fiscal Policy Increases Interest Rates Crowding Out in the Short Run

© 2007 Prentice Hall Business Publishing; Essentials of Economics, R. Glenn Hubbard, Anthony Patrick O’Brien CHAPTER 17: Fiscal Policy 11 of 32 The Limits of Using Fiscal Policy to Stabilize the Economy The Effect of Crowding Out in the Short Run Crowding Out in the Short Run

© 2007 Prentice Hall Business Publishing; Essentials of Economics, R. Glenn Hubbard, Anthony Patrick O’Brien CHAPTER 17: Fiscal Policy 12 of 32 Deficits, Surpluses, and Federal Government Debt Budget deficit: The situation in which the government’s spending is greater than its tax revenue. Budget Surplus: The situation in which the government’s expenditures are less than its tax revenue.

© 2007 Prentice Hall Business Publishing; Essentials of Economics, R. Glenn Hubbard, Anthony Patrick O’Brien CHAPTER 17: Fiscal Policy 13 of 32 Deficits, Surpluses, and Federal Government Debt The Federal Government Debt Is the Government Debt a Problem? The Federal Government Debt,