Chapter 14 Fiscal Policy
One-Page Test Review of Chapter 11 may help with exams. Updated 10/25/17 Please
I. Economic Goals of the U. S. Employment Act of 1946
began reaction to five-year Soviet Union economic plans.
A. Set four economic goals
a. Economic growth
b. Price stability
c. Low unemployment
d. Positive balance of payments
B. Created Council of Economic Advisors conomic
C. Humphrey–Hawkins 1978 Full Employment Act
set specific goals
1. Set five-year goals for economy
2. Specific goals
a. 4% unemployment
b. 3% inflation by 1985, 0% by 1988
c. Reduce balance of payments deficit
d. Increase economic growth and investment
e. Reduce the size of the public sector
D. Government Policy Options to Meet Goals
1. Fiscal policy, the focal point of Keynesian
economics, is this chapter's topic.
a. Discretionary fiscal policy
b. Automatic stabilizers
2. Monetary Policy will be covered in chapter 15.
3. Appropriate Fiscal Policy leads to noninflationary
E. Some History
a. The Employment Act of 1946
b. 70 Years of Advising the President by the CEA
Discretionary Fiscal Policy
In U.S. Government Spending Increases GDP
In Europe Austerity Was
Either Neutral or Destructive.
Editors Note: The long-term affects of high debt and inflation from borrowing will not be known for a years.
III. Automatic stabilizers
Effectiveness of Fiscal Policy
1. Determining when recessions begin is difficult.
a. Disagreement over whether the U.S. was in
a recession from 1989-1991 resulted in little
fiscal action being taken.
b. The 2001 slowdown happened so fast there
was not time for preemptive action.
2. Fiscal policy takes time to implement
3. There will be a delay because it takes business
time to expand capital investment.
B. Political considerations
1. Some spending programs are difficult to cut
(social security, military, education).
2. Expansionary bias: people vote to spend but
not to tax.
3. Political business cycle: it is difficult
to accomplish anything economically
constructive during an election year
C. Recently, many felt the federal debt is too big
and has rendered fiscal policy ineffective.
Its success in ending the 2001 recession has
yet to be determined although the Federal
budget surplus certainly makes it easier to
increase federal spending and decrease
taxes although the expense of fighting three
wars has again increased the deficit.
D. In 2012 People Fear the Drag of Taking Away
the Stimulus of 2009- 2011.
E. Kansas Fiscal Policy Tax Cut Failed 10/ 24/17 Barry Ritholtz
See Chart State and local cuts have very nearly run their course at this point, but the economy now faces the run-off of stimulus programmers, as well as the expiration of emergency unemployment benefits and, potentially, the expiration of lots of other tax proposals. The President's latest plan aims to move the total government impact on growth from a drag of about 1.5 percentage points of GDP to approximately even. When the economy is growing at between 1% and 2% per year, a 1.5 percentage point drag on output is a very big deal indeed. See Government Spending Might Not Create Jobs Even During Recessions
Federal Expenditures Lagged
Great Recession Recovery Also Lagged
Editor's Note: Fiscal Policy and the
A world-wide saving glut developed in the late 1990's as the Asian Crisis caused developing nations to be more conservative and accumulate mostly dollar reserves. Their resulting lack of demand created a positive trade balance and the need to create demand else ware to soak it up. The US did it's part with two
F. Raising Taxes In 2012 Not Same As 1993 from businessinsider
G. Affect of Tax increases in 1937
Fiscal Policy Affects the Private Economy
A. Until recently, government borrowing increased the
demand for loanable funds causing higher long-term
1. Crowding out is the term used to describe how
high rates due to government borrowing lower
2. Many feel high economic growth of the late
1990's resulted because of low interest rates
caused by federal fiscal responsibility.
B. In the early 1990 people were people are concerned
about the fiscal drag caused by a federal surplus.
C. Can Fiscal Policy Stabilize Output
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