1. Fiscal Policy and the Multiplier

2. Unemployment

3. Economic Growth

4. CPI and PPI

5. Income Determination GDP = C + I + G + (X-M) CONSUMPTION INVESTMENT GOVERNMENT NET EXPORTS

6. Fiscal Policy Changes in government spending and taxes to influence the level of economic activity –Increase taxes, contract the economy –Decrease taxes, stimulate the economy –Increase government spending, stimulate the economy –Decrease government spending, contract the economy President and Congress determine fiscal policy

7. G or T? Changes in G have greater impact on the economy than changes in taxes. –Government spending is direct –Taxes depend on what consumers do with the tax cut or what they would have done with the money going to pay the tax increase (how much would they consume, how much would they save?)

8. Crowding Out Government increases spending Finances it by borrowing in credit market Interest rates go up Private investment falls Increased government spending is offset by decreased private investment

9. The Expenditure Multiplier There is a change in spending The change in spending becomes a change in income for others Those changes in income become spending The change in spending becomes a change in income for others Etc.

10. Main Points Three macro goals –Full employment, economic growth, price stability Discretionary fiscal policy – the use of changes in government spending and taxes to influence the level of economic activity

11. Main Points Expenditure multiplier – change in initial spending is multiplied to cause greater change in spending Changes in G have greater impact than changes in T

12. Main Points Government deficit – spending greater than taxes per year Government debt – accumulated deficits Crowding out – government spending financed by private borrowing raises interest rates and crowds out private investment