fiscal policy hs
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Analyze the effect of each on inflation and unemployment:Consumers expect an economic downturn
A new president is elected and the profit expectations of business executives rise
Power companies switch to solar energy causing electricity prices to fall
Federal government increases the sales tax on gasoline to balance the budget
What graphical explanation would explain following conditions?Price Level and unemployment rise
Price level falls and unemployment rises
Price level falls and unemployment stays the same
Price level remains the same and unemployment rises
Fiscal Policy
Government’s Role
Regulation of Private Market, including externalities & information
Provision of Public Goods
Institutional Stability, including courts and banks
Promoting Cultural Values
Why Provide Public Goods?Equity – Everyone should have access to 911 services
Efficiency – Economies of scale and easier to collectively provide
Overcome Free Rider problem – will not be privately providedProvide infrastructure necessary to society and economy, See Monty Python
Types of SpendingChoice or Discretionary: Funded year to
yearMandatory or Non-discretionary: Funded by
existing lawsAutomatic Stabilizers: Unemployment
and Income support
Social Security and Mandatory spending increasing as population ages and health care costs go up
Could change eligibility requirements
Defense51%
Domestic46%
International3%
Goals of Federal SpendingProvide and maintain public goods
(infrastructure)Armies, parks, highways, coastlines, banks
Promote cultural valuesEducation, health care, income redistribution
Stabilize the national economyGrowth, full employment, low inflation
Stabilizing the economyExpansionary ContractionaryDecrease taxes
Automatic rate reduction as income falls
Tax credits or breaksIncrease spending
Automatic increase through unemployment and food stamps
Discretionary programs
Increase taxesAutomatic rate increase
as income risesTax hikes or elimination
of loop holes and breaksDecrease spending
Automatic decrease through unemployment and food stamps
Discretionary programs
Vote, Veto, Vote againDiscretionary Changes Automatic StabilizersIdentification of
problem
Agreeing to a remedy
Time for Remedy to take effect
No identification
Real time corrections
-
Fiscal Policy ComplicationsCrowding out: Deficits and debts
Regulatory lags: recognition, execution and implementation
Ricardian Equivalence: No effect
TaxesThe revenue side
16th amendment
Consider tax policies:Current Marginal tax SystemHead TaxFlat TaxConsumption tax
Tax EvaluationConsider efficiency and equity
Efficiency – Does it distort behavior (dividend taxes) & is administration simple (1040 form)Equity – Is it Fair
Define fairnessBenefits Received
Revenue from gas tax goes towards road maintenanceAbility to Pay
More one makes the more one pays
Tax revenues collected with each plan
Tax Evaluation
Proportional Average tax rate same at all levels
Regressive Average tax rate decreases as
income increasesProgressive
Average tax rate increases as income increases
Tax breakshttps://www.nationalpriorities.org/interactive-
data/taxbreaks/2014/visualization/
2016 candidate tax plan comparisonhttp://apps.urban.org/features/tpccandidate/
Enter income see tax burden change with each candidate
http://www.taxpolicycenter.org/interactive-tools/vox-presidential-tax-calculator
How high is too high?
Tax vs SpendingTaxing one-time bill on the books
indefinitely – complicated tax codeSpending annual appropriation
Spending $1 same as Taxing one less $1
Both $1 in her pocket only different politically
Fiscal Policy and AD-AS
How to move the economy:Supply Side Demand Side
JB Say “Supply creates its own demand”
Long run plan
Keynes need for stimulus
Can have quick effects
AS’
AD’
Expansionary: Increase ADAutomatic Stabilizers:
Unemployment checks + lower tax bracketsDecrease taxesIncrease Spending
Expansionary: Increase ASCreate business/resource incentivesLower (certain) taxes
Contractionary: Decrease ADAutomatic Stabilizers:
Fewer unemployment checks + higher tax brackets
Increase taxesDecrease spending