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# McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

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Page 1: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

#

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Fiscal Policy, Deficits, and Debt

8

Page 2: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-2

Fiscal Policy

• Deliberate changes in

• Government spending

• Taxes

• Designed to

• Achieve full employment

• Control inflation

• Encourage economic growth

LO1

Page 3: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-3

Expansionary Fiscal Policy

• Use during a recession

• Increase government spending

• Decrease taxes

• Combination of both

• Create a deficit

LO1

Page 4: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-4

Expansionary Fiscal Policy

Real GDP (billions)

Pri

ce l

evel

AD2

AD1

$5 billion increase inspending

Full $20 billion increase inaggregate demand

AS

$490 $510

P1

LO1

Recessionsdecrease AD

Page 5: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-5

Contractionary Fiscal Policy

• Use during demand-pull inflation

• Decrease government spending

• Increase taxes

• Combination of both

• Create a surplus

LO1

Page 6: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-6

Contractionary Fiscal Policy

Real GDP (billions)

Pri

ce l

evel

AD3

AD4

$3 billion initialdecrease inspending

Full $12 billion decrease inaggregate demand

AS

$502 $522

P2

AD5

$510

d b

aP1

c

LO1

Page 7: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-7

Built-in Stability

• Automatic stabilizers

• Taxes vary directly with GDP

• Transfers vary inversely with GDP

• Reduces severity of business fluctuations

• Tax progressivity

• Progressive tax system

• Proportional tax system

• Regressive tax systemLO2

Page 8: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-8

Built-in Stability

G

T

Deficit

Surplus

GDP1 GDP2 GDP3

Real domestic output, GDP

Go

vern

men

t ex

pen

dit

ure

s, G

,an

d t

ax r

even

ues

, T

LO2

Page 9: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-9

Evaluating Fiscal Policy

• Is the fiscal policy. . .

• Expansionary?

• Neutral?

• Contractionary?

• Use the cyclically adjusted budget to evaluate

LO3

Page 10: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-10

Recent U.S. Fiscal PolicyFederal Deficits (-) and Surpluses (+) as Percentages of GDP, 2000–2010

(1)Year

(2)Actual Deficit –

or Surplus +

(3)Cyclically Adjusted

Deficit – or Surplus +*

2000 +2.5 +1.0

2001 +1.3 +0.5

2002 -1.5 -1.3

2003 -3.4 -2.8

2004 -3.5 -3.3

2005 -2.6 -2.7

2006 -1.9 -2.2

2007 -1.2 -1.3

2008 -3.2 -2.9

2009 -9.4 -7.3

2010 -8.4 -6.1•As a percentage of potential GDPSource: Congressional Budget Office, www.cbo.gov.

LO3

Page 11: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-11

Fiscal Policy: The Great Recession

• Financial market problems began in 2007

• Credit market freeze

• Pessimism spreads to the overall economy

• Recession officially began December 2007 and lasted 18 months

LO4

Page 12: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-12

Budget Deficits and Projections

Source: Congressional Budget Office, www.cbo.gov.

LO4

$400

0

-400

-800

-1200

-1600

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

Bu

dg

et d

efic

it (

-) o

r su

rplu

s, b

illi

on

s

Page 13: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-13

Problems, Criticisms, & Complications

• Problems of timing

• Recognition lag

• Administrative lag

• Operational lag

• Political considerations

• Future policy reversals

• Offsetting state and local finance

• Crowding-out effect

LO4

Page 14: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-14

Current Thinking on Fiscal Policy

• Let the Federal Reserve handle short-term fluctuations

• Fiscal policy should be evaluated in terms of long-term effects

• Use tax cuts to enhance work effort, investment, and innovation

• Use government spending on public capital projects

LO4

Page 15: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-15

The U.S. Public Debt

• $13.6 trillion in 2010

• The accumulation of years of federal deficits and surpluses

• Owed to the holders of U.S. securities

• Treasury bills

• Treasury notes

• Treasury bonds

• U.S. savings bonds

LO4

Page 16: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-16

The U.S. Public Debt

LO4

Debt held outside

the federal government

and theFederal

Reserve:61%

Debt held bythe federal government

and the Federal

Reserve:39%

Foreign Ownership

32%

11%

13%

5%

6%

U.S. Government

Agencies33%

U.S. Banks and Other Financial Institutions

Other, including State and Local Gov’ts

Federal Reserve

U.S. Individuals

Page 17: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-17

The U.S. Public Debt

LO4

Page 18: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-18

Global Snapshot

Public Sector Debt as Percentage of GDP, 2010

JapanGreece

ItalyBelgium

United StatesHungary

FranceUnited Kingdom

GermanySpain

NetherlandsCanada

0 20 40 60 80 100 120

Source: Organization for Economic Cooperation and Development, OECD

LO4

Page 19: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-19

The U.S. Public Debt

• Interest charges on debt

• Largest burden of the debt

• 1.4 percent of GDP in 2010

• False Concerns

• Bankruptcy

•Refinancing

•Taxation

• Burdening future generationsLO4

Page 20: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-20

Substantive Issues

• Income distribution

• Incentives

• Foreign-owned public debt

• Crowding-out effect revisited

• Future generations

• Public investment

LO4

Page 21: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-21

Crowding-Out Effect

5 10 15 20 25 30 35 400

2

4

6

8

10

12

14

16R

eal

inte

rest

rat

e (p

erce

nt)

Investment (billions of dollars)

ID1

ID2

a

b c

Increase ininvestmentdemand

Crowding-out effect

LO4

Page 22: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-22

Social Security Shortfalls

• More Americans will be receiving benefits as they age

• Social Security shortfalls

• Income during retirement

• Funds will be depleted by 2036

LO5

Page 23: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-23

Social Security Shortfalls

LO5

Page 24: # McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Fiscal Policy, Deficits, and Debt 8

8-24

Social Security Shortfalls

• Possible options “to fix” include

• Increasing the retirement age

• Increasing the portion of earnings subject to the Social Security tax

• Disqualifying wealthy individuals

• Redirecting low-skilled immigrants to higher-skilled, higher-paying work

• Defined contribution plans owned by individuals

LO5


24 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. The Balance of Payments, Exchange Rates, and Trade Deficits

McGraw-Hill/Irwin ©2005 The McGraw-Hill Companies, All rights reserved McGraw-Hill/Irwin

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2004

McGraw-Hill The McGraw-Hill Companies, Inc., 2004

Fiscal Policy, Deficits, and Debt Chapter 13 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies

Fiscal Policy, Deficits, and Debt 13 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill/Irwin Copyright © 2004, The McGraw-Hill Companies

Correlated to Macmillan/McGraw-Hill€¦ · Mondo Bookshop - Grade K correlated to Macmillan/McGraw-Hill Treasures. Mondo Bookshop Macmillan/McGraw-Hill Treasures. Mondo Macmillan/McGraw-Hill

Chapter 14: Fiscal Policy, Deficits, and Debt. Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Fiscal Policy

© The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Deficits And Debt Chapter 19

McGraw-Hill Science Newsroom - Macmillan/McGraw-Hill€¦ · McGraw-Hill Science Newsroom Primary Edition complements the McGraw-Hill Science 2000textbook series by offering one interactive

Fiscal Policy, Deficits, and Debt Chapter 30 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Deficits and Debt Chapter 12 Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Fiscal Policy, Deficits, and Debt 13 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

© McGraw-Hill Companies, Inc., McGraw-Hill/Irwin McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved

21 The Balance of Payments, Exchange Rates, and Trade Deficits McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved

Mcgraw Hill

McGraw-Hill/Irwin Copyright © 2008, The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies,

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

McGraw-Hill © 2000 The McGraw-Hill Companies 1 S M McGraw-Hill © 2000 The McGraw-Hill Companies

© 2002 McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Deficits, Surpluses, and Debt Chapter 12

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill

McGraw-Hill/Irwin ©2005 The McGraw-Hill Companies, All rights reserved ©2005 The McGraw-Hill Companies, All rights reserved McGraw-Hill/Irwin

McGraw-Hill Ryerson Copyright © 2006 by The McGraw-Hill

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1 The Sociological Perspective McGraw-Hill © 2005 The McGraw-Hill Companies, Inc

© McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

Chapter 10 · Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 $ Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc.,

Chapter 12: Deficits and Debt McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. 13e

Local Marketing in Mature Markets Chapter Eight. Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,,

The Balance of Payments, Exchange Rates, and Trade Deficits Chapter 38 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights

© 2003 McGraw-Hill Ryerson Limited. Politics, Surpluses, Deficits, and Debt Chapter 12

Chapter Ten LocalMarketing in Emerging Markets Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,,

Irwin/McGraw Hill The McGraw-Hill Companies, Inc., 2000 · Slides by Matthew Will Chapter 2 Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 2000. Irwin/McGraw Hill ... " Tools