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Unit 6 Chapter 29

Unit 6 Chapter 29. Managing Aggregate Demand: Fiscal Policy. OVERVIEW. Gov’t has played passive role; both G & T fixed Looking at how gov’t uses spending and taxes to effect demand-side of economy FIXED TAXES: taxes that don’t vary with GDP (property taxes)

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Unit 6 Chapter 29

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  1. Unit 6 Chapter 29 Managing Aggregate Demand: Fiscal Policy

  2. OVERVIEW • Gov’t has played passive role; both G & T fixed • Looking at how gov’t uses spending and taxes to effect demand-side of economy • FIXED TAXES: taxes that don’t vary with GDP (property taxes) • VARIABLE TAXES: taxes that do vary with GDP (income taxes)

  3. Supply-side policy • *Certain types of tax cuts are expected to increase AS • Can be used to reward working, saving, and investing more • Response to tax cuts-increase in availability in labor and capital PL ASo AS1 *Fights inflation and unemployment simultaneously PLeo PLe1 ADo RGDP EGDPo EGDP1

  4. Supply-side tax policies • Lower personal income taxes • People more willing to work since gov’t isn’t taking as much of their additional wages • Productivity up, costs down, profit up, AS up • Reduce taxes on income from savings • People will save more, make more money available for loans, businesses can borrow to buy more tech. advanced capital • Production up, costs down, profit up, AS up • Reduce capital gains tax • Reduces taxes on income from sale of assets • Gives incentive to invest

  5. SUPPLY-SIDE TAX POLICIES CONT. • Reduce corporate income taxes • Increases amount profit companies keep and can reinvest in capital • Pending tax credits for research and development • Incentive to increase use of technology ASo PLe1 *Successful supply-side tax cut PLeo AD1 ADo EGDPo EGDP1

  6. CRITICISMS • Effectiveness of supply-side policy depends on which types of taxes are cut • Supply-side tax cuts have their primary impact on AD rather than AS in the short run • Supply-side tax cuts are likely to widen income inequalities • Supply-side tax cuts are almost certain to lead to bigger budget deficits • Supply-side tax cuts should be seen as a way to promote long-term ec. growth

  7. FISCAL POLICY • Multipliers used to determine the appropriate fiscal policy • PLANNING FISCAL POLICY IS LIKE SHOOTING THROUGH A DENSE FOG AT A ERRATICALLY MOVING TARGET WITH AN INACCURATE GUN AND SLOW-MOVING BULLETS • Expansionary FP: cut taxes, increase transfers, increase G • Contractionary FP: increase taxes, decrease transfers, decrease G

  8. LIBERALS VS. CONSERVATIVES • Liberals: US’s needs include better schools, healthcare, diminishing poverty, environment, infrastructure, etc. • For EFP: increase G. For CFP: increase taxes • Conservatives: Gov’t limits daily lives and circumscribes our freedom • For EFP: cut taxes. For CFP: decrease G

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