CHAPTER16Fiscal PolicyChapterOutlineandLearningObjectives16.1WhatlsFiscalPolicy?JOB CREATIONALECOT16.2TheEffectsofFiscal PolicyonRealGDPandthePriceLevel16.3 Fiscal Policy intheDynamicAggregateDemandandAggregate Supply Model16.4TheGovernmentPurchasesandTaxMultipliers16.5 TheLimits ofUsingFiscal PolicytoStabilize the Economy16.6Deficits,Surpluses,andFederalGovernmentDebt16.7TheEffectsof Fiscal Policy intheLongRunAppendix:ACloserLookattheMultiplier
1 Chapter Outline and Learning Objectives 16.1 What Is Fiscal Policy? 16.2 The Effects of Fiscal Policy on Real GDP and the Price Level 16.3 Fiscal Policy in the Dynamic Aggregate Demand and Aggregate Supply Model 16.4 The Government Purchases and Tax Multipliers 16.5 The Limits of Using Fiscal Policy to Stabilize the Economy 16.6 Deficits, Surpluses, and Federal Government Debt 16.7 The Effects of Fiscal Policy in the Long Run Appendix: A Closer Look at the Multiplier CHAPTER 16 CHAPTER Fiscal Policy
DoesGovernmentSpendingCreateJobs?Government spending is a component of real GDP:Y=C+I+G+NXThis makes it appear as though increases in government spendingincrease output-and hence other relevant economic variables likeemployment.However some economistsarguethatgovernment spending simplyshifts employment from one group to another-it does not increasetotalemployment.:This debate was particularly important after the 2007-2009recession: can the government use discretionaryfiscal policytoincrease employment?@2015Pearson Education,Inc
© 2015 Pearson Education, Inc. 2 Does Government Spending Create Jobs? Government spending is a component of real GDP: Y = C + I + G + NX This makes it appear as though increases in government spending increase output—and hence other relevant economic variables like employment. However some economists argue that government spending simply shifts employment from one group to another—it does not increase total employment. • This debate was particularly important after the 2007-2009 recession: can the government use discretionary fiscal policy to increase employment?
WhatisFiscalPolicy16.1LEARNINGOBJECTIVEDefinefiscalpolicy@2015PearsonEducation,Inc3
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 3 What is Fiscal Policy 16.1 Define fiscal policy
Fiscal PolicyDefinedFiscal policy refers to changes infederaltaxes andpurchases thatare intended to achieve macroeconomic policy objectives.(State taxes and spending are not generally aimed at affectingnational-levelobjectives.)Some forms of government spending and taxes automaticallyincrease or decrease along withthe business cycle;theseareautomaticstabilizers.Example:Unemployment insurancepayments arelargerduringarecession.Discretionary fiscal policy, on the other hand, refers to intentionalactionsthegovernmenttakestochange spending ortaxes@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 4 Fiscal Policy Defined Fiscal policy refers to changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. (State taxes and spending are not generally aimed at affecting national-level objectives.) Some forms of government spending and taxes automatically increase or decrease along with the business cycle; these are automatic stabilizers. Example: Unemployment insurance payments are larger during a recession. Discretionary fiscal policy, on the other hand, refers to intentional actions the government takes to change spending or taxes
How Much Government Spending Is Federal?Federal 100%expendituresasapercentageoftotal90governmentexpenditures807060World War Il5040GreatDepression30194919291939195919691979198919992009BeforetheGreatDepressionoftheFigure 16.1Thefederalgovernment's1930s,mostgovernmentspendingshareoftotalexpenditures,1929-2012was at the state or local level;nowthe federal government's shareistwo-thirdstothree-guarters2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 5 How Much Government Spending Is Federal? Before the Great Depression of the 1930s, most government spending was at the state or local level; now the federal government’s share is two-thirds to three-quarters. The federal government’s share of total expenditures, 1929-2012 Figure 16.1