Summary of chapters 1-11 of the book 'Essentials of Economics', Campbell Mcconnell & Stanley Brue, 4th edition.
Summary of chapters 1-11 or 'Essentials of Economics', Campbell Mcconnell & Stanley Brue, 4th edition.
principles economics essentials principles of economics 2020 2019 summary samenvatting law international business international business law microeconomics macroeconomics leiden university leiden universiteit
Connected book
Book Title:
Author(s):
Edition:
ISBN:
Edition:
More summaries for
Samenvatting Essentials of economics
Principles of Economics Chapters 1-11
All for this textbook (3)
Written for
Universiteit Leiden (UL)
International Business Law
Principles of Economics
All documents for this subject (2)
Seller
Follow
steefl
Reviews received
Content preview
CHAPTER 13 – FISCAL POLICY, DEFICITS AND DEBT
I. FISCAL. POLICY AND THE AS-AD MODEL
Fiscal policy is discretionary (active), and does not activate automatically, independent of
governmental intervention.
Expansionary fiscal policy
Is designed AD, and therefore GDP (and remove
inefficiency/unemployment).
Used to remedy a negative GDP gap – rightward
shift of AD.
a. Government spending
Fiscal policy should move to a government budget
deficit (tax revenues < government spending).
b. Tax
Tax decrease > increase in government spending
necessary to achieve the same rightward shift of
AD.
c. Combination of both.
Contractionary fiscal policy
Is designed to AD, and therefore inflation.
Used to remedy a positive GDP gap (inflation) –
leftward shift of AD.
a. Government spending
Fiscal policy should move to a government budget
surplus (tax revenues > government spending).
b. Tax
Tax increase > decrease in government spending
necessary to achieve the same leftward shift of AD.
c. Combination of both.
II. BUILT-IN STABILITY
To a certain degree, government tax revenues change automatically and in ways that stabilize
the economy over the course of the business cycle.
“Nondiscretionary budgetary policy”Nondiscretionary budgetary policy”
Automatic or built-in stabilizers
- Anything that increases/reduces the budget deficit/
surplus without action by policymakers.
There is a direct relationship between the level of GDP
and tax revenues (see graph):
- Taxes reduce spending and AD.
- Reductions in spending are desirable when the
economy is moving towards inflation (and vice versa).
1
, Economic importance
Built-in stability reduces the severity of business fluctuations. They can only dampen, not
counteract, swings in real GDP.
However:
Fiscal policy – tax rates and government expenditures, or;
Monetary policy – central bank / interest rates;
May still be needed to correct recession or inflation.
III. EVALUATING FISCAL POLICY
Economists use the cyclically adjusted budget to find out whether a government’s
discretionary fiscal policy is:
a. Expansionary
b. Neutral
c. Contractionary
By:
Adjusting actual federal budget deficits and surpluses;
Which will account for the changes in tax revenues that happen automatically whenever
GDP changes.
Comparing actual government spending with the tax revenues that would have
occurred if the economy had achieved full-employment GDP.
IV. PROBLEMS, CRITICISMS AND COMPLICATIONS
Problems of timing
- Recognition lag – the time between the start of a recession and the awareness of people that
it is happening. It sometimes takes months to be able to confidently conclude that a
recession has begun.
- Administrative lag – lag between the time that the need for fiscal action is realized, and
when the necessary action is actually taken.
- Operational lag – lag between the time fiscal action is taken and the time that action starts
affecting the economy.
Future policy reversals
Fiscal policy may fail to achieve its intended purpose if households expect future policy
reversals.
Crowding-out effect
Expansionary fiscal policy:
- May increase the interest rate and reduce
investment spending
Weakening or canceling the stimulus of the
expansionary policy.
Crowding out interest-sensitive consumption
spending.
It is caused by the government’s increased
borrowing to finance its budget deficits/debts.
2
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller steefl. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $7.55. You're not tied to anything after your purchase.
