Fiscal Policy

1. Fiscal Policy Fiscal policy Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives, such as high employment, price stability, and high rates of economic growth. Automatic Stabilizers versus Discretionary Fiscal Policy Automatic stabilizers Government spending and taxes that automatically increase or decrease along with the business cycle.

2. An Overview of Government Spending and Taxes The Federal Government’s Share of Total Government Expenditures, 1929–2006

3. An Overview of Government Spending and Taxes Federal Purchases and Federal Expenditures as a Percentage of GDP, 1950–2006

4. Fiscal Policy An Overview of Government Spending and Taxes Federal Government Expenditures, 2006

5. Fiscal Policy An Overview of Government Spending and Taxes Federal Government Revenue, 2006

6. The Effects of Fiscal Policyon Real GDP and the Price Level Looks a lot like expansionary and contractionary monetary policy …except for impacts on interest rates and investment spending Fiscal Policy

7. The Effects of Fiscal Policyon Real GDP and the Price Level A Summary of How Fiscal Policy Affects Aggregate Demand Countercyclical Fiscal Policy Don’t Let This Happen to YOU!Don’t Confuse Fiscal Policy and Monetary Policy

8. The Government Purchases and Tax Multipliers FIGURE 15.8 The Multiplier Effect and Aggregate Demand

9. Learning Objective 15.3 The Government Purchases and Tax Multipliers The Multiplier Effect of an Increase in Government Purchases This spending multiplier is analogous but not the same as the deposit multiplier

10. The Government Purchases and Tax Multipliers • A cut in tax rates affects equilibrium real GDP through two channels: • A cut in tax rates increases the disposable income of households, which leads them to increase their consumption spending, and • a cut in tax rates increases the size of the multiplier effect … it reduces the rate at which purchasing power leaks from the spending stream • The less the marginal propensity to leak, the greater the spending multiplier.

11. The Government Purchases and Tax Multipliers Taking into Account the Effects of Aggregate Supply The Multiplier Effect and Aggregate Supply

12. Crowding out A decline in private expenditures as a result of an increase in government purchases. The Limits of Using Fiscal Policyto Stabilize the Economy Money market An Expansionary Fiscal Policy Increases Interest Rates

13. The Limits of Using Fiscal Policyto Stabilize the Economy Crowding Out in the Short Run FIGURE 15.12 The Effect of Crowding Out in the Short Run

14. The Effects of Fiscal Policy in the Long Run The Economic Effect of “Supply Side” Tax Reform The Supply-Side Effects of a Tax Change

15. Deficits, Surpluses, and Federal Government Debt The Federal Budget Deficit, 1901–2006 Cyclically adjusted budget deficit or surplus The deficit or surplus in the federal government’s budget if the economy were at potential GDP.

16. MakingtheConnection • Did Fiscal Policy Fail during the Great Depression? Although government spending increased during the Great Depression, the cyclically adjusted budget was in surplus most years.

17. Deficits, Surpluses, and Federal Government Debt The Federal Government Debt The Federal Government Debt, 1901–2006

18. K e y T e r m s Automatic stabilizers Budget deficit Budget surplus Crowding out Cyclically adjusted budget deficit or surplus Fiscal policy Multiplier effect Tax wedge