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Discretionary Fiscal Policy: Stimulating Economic Activity and Achieving National Goals

Explore the concept of discretionary fiscal policy, which involves government changes in spending and taxes to achieve economic goals such as high employment, price stability, and economic growth. Learn about the impact of changes in government spending on areas like military and education, as well as the effects of tax changes on aggregate demand. Understand the potential offsets to fiscal policy, including the crowding-out effect.

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Discretionary Fiscal Policy: Stimulating Economic Activity and Achieving National Goals

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  1. Chapter 13 Fiscal Policy

  2. Discretionary Fiscal Policy Fiscal Policy The discretionary changes in government expenditures and/or taxes in order to achieve certain national economic goals, such as: High employment (low unemployment) Price stability Economic growth Improvement of international payments balance

  3. Discretionary Fiscal Policy (cont'd) An increase in government spending will stimulate economic activity Changes in government spending Military spending Education spending Budgets for government agencies

  4. Discretionary Fiscal Policy (cont'd) Change in taxes A rise in taxes causes a reduction in aggregate demand because it can reduce consumption spending, investment expenditures, and net exports.

  5. Possible Offsets to Fiscal Policy Fiscal policy does not operate in a vacuum and important questions must be answered. How are expenditures financed and by whom? If taxes are increased what does government do with the taxes? What will happen if individuals worry about increases in future taxes?

  6. Possible Offsets to Fiscal Policy (cont'd) Crowding-Out Effect The tendency of expansionary fiscal policy to cause a decrease in planned investment or planned consumption in the private sector; this decrease normally results from the rise of interest rates.

  7. Figure 13-3 The Crowding-Out Effect, Step by Step

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