Contractionary and Expansionary Fiscal Policy- 03/07/2017

Contractionary and Expansionary Fiscal Policy

Contractionary (The Brake)
-law that reduces inflation, decreases GDP
-closes a inflationary gap
1) Decreases Government spending
2) Tax increases
3) Combinations of the two

Expansionary fiscal policy (The GAS)
-law that reduces unemployment and increases GDP
-closes a recessionary gap
1) Increases Government spending

2) Decreases taxes on consumers
3) Combination of the two

Automatic or Butt-in Stabilizers
-Anything that increases the government’s budget deficit during a recession and increases it’s budget surplus during inflation without requiring explicit action by policy makers.

Transfer Payments
-Welfare checks
-Food Stamps
-Unemployment checks
-Corporate dividends
-Social security
-Veteran’s Benefits

Fiscal Policy- 03/06/17

Fiscal Policy

Fiscal Policy:
-actions by congress to stabilize economy
- changes in expenditures or tax revenue of the federal government
- enacted to promote nation’s economic goals: full employment, price stability, and economic growth

2 tools of Fiscal Policy:

-Taxes – government can increase or decrease taxes

-Spending – government can increase/ decrease spending

Deficits, Surpluses, Debt

- Balanced budget (revenues = expenditures)

- Budget Deficit (revenues < expenditures)
- Budget Surplus (revenues > expenditures)
- Government Debt (sum of all deficits – sum of all surpluses)

- Government can borrow money when it runs a budget deficit
       -ex) individual taxes, corporations, financial institutions, foreign governments

Discretionary fiscal policy:
- Congress’s action

Contractionary fiscal policy:

- Think surplus

Non- discretionary fiscal policy:
- No action

Three types of Taxes:
1) Progressive taxes
-takes a large % of income from high income groups
-takes more from rich
-ex) current federal income tax system

2) Proportional taxes
-takes the same percent of income from all income groups
-ex) 20% flat income tax on all income groups

3) Regressive Taxes
-takes a large percent from low income groups
-takes from poor
-ex) sales tax

Aggregate Supply Curve- 02/27/2017

Aggregate Supply Curve

Reasons why prices tend to be inflexible or sticky in a downward direction
1) fear of price wars
2) wage contracts
3) minimum wage
4) menu cost
5) morale effort +productivity

Range 1:
- Output is low, relative to the economy’s full employment output
- unemployment increase, real GDP decrease

Range 2:
-Output expands as spending increases

Range 3:
-In the long run, aggregate supply curve is vertical because the only effects of the increase in AD when we’re already at full employment or an increase in the price level

Multipliers- 02/24/17

Multipliers

The Spending Multiplier
- initial change in spending ( C, Ig, G, Xn) causes a larger change in aggregate spending or aggregate demand
- multiplier = change in AD
                    change in C, Ig, G, Xn/

Why does it happen?
-Expenditures + income flows continuously which sets off a spending increase in the economy
-Spending multiplier = 1            or        1

                                    1-MPC               MPS

-Multipliers are (+) when spending increases, and (-) when spending decreases

Tax Multiplier
-government taxes, the multiplier works in reverse b/c now money is leaving the circular flow
-tax multiplier is negative
- tax multiplier = -MPC      or     -MPC
                              1-MPC            MPS

-if there’s a tax cut, then the multiplier is + because there is now more money in the circular flow

Consumption and Savings- 02/23/17

Consumption and Savings

Disposable income:

-Income after taxes or net income

- DI = Gross income – Taxes

2 Choices
-without disposable income, households can either consume, or save

Consumption
-Household spending
-Ability to consume is constrained by
     >the amount of disposable income
     >the propensity to save

Do households consume if DI = 0

-       Autonomous consumption

-       Dissaving

-       APC = C/ DI = % DI that is spent

Saving

- Household Spending
- Ability to consume is constrained by
     >the amount of disposable income

     >the propensity to consume
- Do household have if DI = 0

     >No

- APS = S/DI = % DI that’s not spent

-APC + APS = 1

- 1- APC = APS

- 1- APS = APC

-Marginal propensity to consume

            -C/ DI

            - % of every extra $ earned that is saved

- MPC + MPS = 1

- 1- MPC = MPS

- 1 – MPS = MPC

Determinants of C & S

-Wealth

-Expectations

-Household Debt

-Taxes