1. Chapter Ten: Fiscal Policy

2. The Role of Government Spending and Taxes

3. Table 10.1: An Increase in Government Spending

4. Aggregate Demand and Output Income (Y) 45° 400800 400 800 160 80 E 0 (Unemployment Equilibrium) Full Employment AD 1 (G = 80) AD 0 (G = 0) Y* E1E1 Full Employment Equilibrium Figure 10.1: Increased Government Spending

5. Output (Y) Income (Y) Spending (AD) consumption (C) Banks and Financial System Government Production generates income to households Savings Intended Investment Net Taxes Government Spending Figure 10.2: A Macroeconomic Model with Government Spending and Taxes

6. The Federal Budget

7. Personal income taxes (30%) Corporate taxes (5%) Social insurance and retirement taxes (23%) Excise, estate, and other taxes (6%) Borrowing to cover deficit (36%) Figure 10.3a: United States Government Source of Funds and Outlays, Fiscal 2011

8. Social security, Medicare (33%) National defense, veterans, foreign affairs (24%) Income security, education, social services (20%) Health (10%) Science, natural resources, transportation (5%) Justice, government administration (2%) Interest on debt (6%) Figure 10.3b

9. Figure 10.4: Federal Surplus of Deficit as a Percent of GDP

10. Percent of GDP Outlays Receipts Surplus or Deficit Figure 10.5: Federal Outlays, Receipts, and Surplus/Deficit, as a Percent of GDP, 1980-2011 Source: Economic Report of the President 2012, Table b-79.

11. Policy Issues

12. Crowding out Figure 10.6: Crowding Out in the Loanable Funds Market

13. Aggregate demand and output AD 1 (decrease in t) AD 0 (original t) 45° E1E1 E0E0 Y0Y0 Income (Y) Y1Y1 Slope = mpc(1  t) Figure 10.7: A Reduction in the Proportional Tax Rate

14. Table 10.2: Different Multiplier Effects Tax CutsMultiplier Nonrefundable Lump-Sum Tax Rebate1.02 Refundable Lump-Sum Tax Rebate1.26 Temporary Tax Cuts Payroll Tax Holiday1.29 Across the Board Tax Cut1.03 Accelerated Depreciation0.27 Permanent Tax Cuts Extend Alternative Minimum Tax Patch0.48 Make Bush Income Tax Cuts Permanent0.29 Make Dividend and Capital Gains Tax Cuts Permanent 0.37 Cut Corporate Tax Rate0.30 Spending Increases Extend Unemployment Insurance Benefits1.64 Temporarily Increase Food Stamps1.73 Issue General Aid to State Governments1.36 Increase Infrastructure Spending1.59 Source: M. Zandi, “The Economic Impact of the American Recovery and Reinvestment Act,” Moody’s Economy.com, 2009.