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Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition

Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition. Chapter 13: Fiscal Policy and the Federal Budget. Fiscal Policy. Expansionary fiscal policy. AS 0. Price level (price index). Full employment output. A. B. Increase in output. AD 0. AD 1. Fiscal Policy.

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Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition

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  1. Contemporary Economics:An Applications ApproachBy Robert J. Carbaugh1st Edition Chapter 13: Fiscal Policy and the Federal Budget

  2. Fiscal Policy Expansionary fiscal policy AS0 Price level (price index) Full employment output A B Increase in output AD0 AD1 Carbaugh, Chap. 13

  3. Fiscal Policy Expansionary fiscal policy and the multiplier Direct effect of an increase in government spending Indirect effect of increased consumption spending AS0 Price level (price index) B A C AD2 AD1 AD0 Carbaugh, Chap. 13

  4. Fiscal Policy Contractionary fiscal policy Fall in price level AS0 Price level (price index) B A AD1 AD0 Fall in price level Full employment 1,100 900 Carbaugh, Chap. 13

  5. Fiscal Policy Crowding-out effect Government spending exceeds taxes, resulting in a budget deficit. As the demand for loanablefunds rises, interestrates increase. The government entersthe loanable funds marketand issues more securities. Firms and householdspurchase less machinery,equipment, autos, and homes.Thus government spendingcrowds out privatesector spending. Carbaugh, Chap. 13

  6. Fiscal Policy Supply-side fiscal policy The goal of supply-sidetax cuts A more dismal view ofsupply-side tax cuts Fall in prices AS0 AS0 AS1 AS1 Price level (price index) Price level (price index) B A A B AD1 AD0 AD0 Increase in real output Carbaugh, Chap. 13

  7. Fiscal Policy The Laffer Curve A Tax revenue ($ billions) B 85 100 48 Carbaugh, Chap. 13

  8. Federal Deficit Federal debt held by the public 1940 $42.8 $96.5 44.3% 1945 235.2 221.4 106.2 1950 219.0 273.6 80.1 1955 226.6 395.3 57.3 1960 236.8 518.2 45.7 1965 260.8 686.7 38.0 1970 283.2 1,009.0 28.1 1975 394.7 1,554.5 25.4 1980 709.8 2,718.9 26.1 1985 1,499.9 4,102.1 36.6 1990 2,410.7 5,684.5 42.4 1995 3,603.4 7,194.8 50.1 1998 3,719.9 8,537.9 43.6 Federal GDP Federal debt as Year debt (bill.) (billions) a % of GDP Source: Economic Report of the President, 1999 Carbaugh, Chap. 13

  9. Government Debt Government debt to GDP ratios for selected countries, 1997 Belgium 126 Italy 94 Hungary 72 Sweden 70 Finland 69 United States 46 France 46 Japan 45 India 44 Germany 39 Government debt as Country a percent of GDP Source: IMF, International Financial Statistics, March 1999 Carbaugh, Chap. 13

  10. Federal Debt Ownership of federal debt, 1998 Source: Federal Reserve Bulletin, May 1999 Carbaugh, Chap. 13

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