Economics
Fiscal Policy Actions in the Short Run
Fiscal policy actions in the short run refer to government decisions to adjust spending and taxation to influence the economy. These actions are aimed at stimulating or slowing down economic activity to address short-term fluctuations in output and employment. By increasing government spending or reducing taxes, fiscal policy can boost demand and support economic growth during downturns.
Written by Perlego with AI-assistance
Related key terms
1 of 5
10 Key excerpts on "Fiscal Policy Actions in the Short Run"
eBook - PDF- William Boyes, Michael Melvin(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
Fiscal policy includes government spending on the provision of goods and services as well as infrastructure. In this photo, workers create mud bricks in the desert. The bricks will be used in infrastructure construction projects. Such activities are often provided by government and funded by taxpayers. Michael Zysman/Dreamstime.com 228 Chapter 11 Fiscal Policy Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 11-1 Fiscal Policy and Aggregate Demand The GDP gap is the difference between potential real GDP and the equilibrium level of real GDP. If the government wants to close the GDP gap so that the equilibrium level of real GDP reaches its potential, it must use fiscal policy to alter aggregate expenditures and cause the aggregate demand curve to shift. Fiscal policy is the government’s policy with respect to spending and taxation. Since aggregate demand includes consumption, investment, net exports, and government spend-ing, government spending on goods and services has a direct effect on the level of aggregate demand. Taxes affect aggregate demand indirectly by changing the disposable income of households, which alters consumption. 11-1a Shifting the Aggregate Demand Curve Changes in government spending and taxes shift the aggregate demand curve. Remember that the aggregate demand curve represents combinations of equilibrium aggregate expendi-tures and alternative price levels. An increase in government spending or a decrease in taxes raises the level of expenditures at every level of prices and moves the aggregate demand curve to the right.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Chapter- 9 Fiscal Policy & Monetary Policy Fiscal Policy In economics, fiscal policy is the use of government expenditure and revenue collection to influence the economy. Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the money supply. The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy: • Aggregate demand and the level of economic activity; • The pattern of resource allocation; • The distribution of income. Fiscal policy refers to the use of the government budget to influence the first of these: economic activity. Stances of fiscal policy The three possible stances of fiscal policy are neutral, expansionary and contractionary. The simplest definitions of these stances are as follows: • A neutral stance of fiscal policy implies a balanced economy. This results in a large tax revenue. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity. • An expansionary stance of fiscal policy involves government spending exceeding tax revenue. • A contractionary fiscal policy occurs when government spending is lower than tax revenue. ____________________ WORLD TECHNOLOGIES ____________________ However, these definitions can be misleading because, even with no changes in spending or tax laws at all, cyclical fluctuations of the economy cause cyclical fluctuations of tax revenues and of some types of government spending, altering the deficit situation; these are not considered to be policy changes.
eBook - PDFMacroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
A more complex model of fiscal policy appears in the appendix to this chapter. Topics discussed in this chapter include: 11-1 Theory of Fiscal Policy Our macroeconomic model so far has viewed government as passive. But govern- ment purchases and transfer payments at all levels in the United States total more than $7.0 trillion a year, making government an important player in the economy. From highway construction to unemployment compensation to income taxes to federal defi- cits, fiscal policy affects the economy in myriad ways. We now move fiscal policy to center stage. As introduced in Chapter 3, fiscal policy refers to government purchases, transfer payments, taxes, and borrowing as they affect macroeconomic variables such as real GDP, employment, the price level, and economic growth. When economists study fiscal policy, they usually focus on the federal government, although governments at all levels affect the economy. 11-1a Fiscal Policy Tools The tools of fiscal policy sort into two broad categories: automatic stabilizers and dis- cretionary fiscal policy. Automatic stabilizers are revenue and spending programs in the federal budget that automatically adjust with the ups and downs of the economy to sta- bilize disposable income and, consequently, consumption and real GDP. For example, the federal income tax is an automatic stabilizer because (1) once adopted, it requires no congressional action to operate year after year, so it’s automatic, and (2) it reduces the drop in disposable income during recessions and reduces the jump in disposable income during expansions, so it’s a stabilizer, a smoother. Discretionary fiscal policy, on the other hand, requires the deliberate manipulation of government purchases, transfer payments, and taxes to promote macroeconomic goals like full employment, price sta- bility, and economic growth. President Obama’s 2009 stimulus plan, which was enacted by Congress, is an example of discretionary fiscal policy.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
A more complex model of fiscal policy appears in the appendix to this chapter. Topics discussed in this chapter include: 25-1 Theory of Fiscal Policy Our macroeconomic model so far has viewed government as passive. But govern- ment purchases and transfer payments at all levels in the United States total more than $7.0 trillion a year, making government an important player in the economy. From highway construction to unemployment compensation to income taxes to federal defi- cits, fiscal policy affects the economy in myriad ways. We now move fiscal policy to center stage. As introduced in Chapter 3, fiscal policy refers to government purchases, transfer payments, taxes, and borrowing as they affect macroeconomic variables such as real GDP, employment, the price level, and economic growth. When economists study fiscal policy, they usually focus on the federal government, although governments at all levels affect the economy. 25-1a Fiscal Policy Tools The tools of fiscal policy sort into two broad categories: automatic stabilizers and dis- cretionary fiscal policy. Automatic stabilizers are revenue and spending programs in the federal budget that automatically adjust with the ups and downs of the economy to sta- bilize disposable income and, consequently, consumption and real GDP. For example, the federal income tax is an automatic stabilizer because (1) once adopted, it requires no congressional action to operate year after year, so it’s automatic, and (2) it reduces the drop in disposable income during recessions and reduces the jump in disposable income during expansions, so it’s a stabilizer, a smoother. Discretionary fiscal policy, on the other hand, requires the deliberate manipulation of government purchases, transfer payments, and taxes to promote macroeconomic goals like full employment, price sta- bility, and economic growth. President Obama’s 2009 stimulus plan, which was enacted by Congress, is an example of discretionary fiscal policy.
eBook - PDFMacroeconomics for Business
The Manager's Way of Understanding the Global Economy
- Lawrence S. Davidson, Andreas Hauskrecht, Jürgen von Hagen(Authors)
- 2020(Publication Date)
- Cambridge University Press(Publisher)
6 Monetary and Fiscal Policy in the Long Run In the previous chapters, we have discussed the short-run performance of the macroeconomy and the effects of monetary and fiscal policies in the short run. Now, we turn to the long run. This does not necessarily mean that we turn from monthly and quarterly time horizons to several years, although that is often the case. In the context of economic policies, short and long run are analytical concepts with no fixed analogy in time. The long run is the time horizon over which firms can vary all those things that lead to fixed costs in the short run, such as their stocks of capital, the location of their activities, and their production technologies. The long run is also the time horizon over which wages fully adjust to price level movements. Why do we care about the long run? Doesn’t life happen here and now, in the short run? This thought seems to underlie the dictum of one famous economist, John Maynard Keynes: “In the long run, we are all dead!” However, responsible policymakers should care about the long run. The reason is that monetary and fiscal policies that have desirable effects in the short run often have very undesirable effects in the long run. For example, we have seen that, in the short run, monetary policy can reduce the rate of unemployment by raising the rate of inflation. In the long run, however, this is impossible, as you will see in this chapter and it would take ever higher-inflation rates to maintain the same desired rate of unemployment. More generally, long-run considerations constrain the extent to which AD policies should be used. With regard to fiscal policy, another long-run consideration arises from the fact that using government budget deficits to stimulate aggregate demand over an extended period of time results in the accumulation of large amounts of public debt.
eBook - PDFPublic Sector Economics
Made Simple
- D. I. Trotman-Dickenson(Author)
- 2014(Publication Date)
- Made Simple(Publisher)
Fiscal Policy to Stabilise an Economy 241 Monetary Policy, Friedman's Monetarist Prescription In recent years governments of the leading industrial countries have shifted the emphasis in the management of their economies from fiscal to monetary policy. The chief exponent of monetarism is Professor Milton Friedman. A government implements its monetary policy through the central bank. The Friedman prescription for control of the economy is to control the money supply. The money supply is affected by interest rates and the liquidity of the money market. Interest rates. Changes in interest rates can be used to expand and to contract an economy: (a) A cut in the official interest rate is generally followed by reductions in interest charges by financial institutions such as banks, finance houses, and building societies. Credit becomes cheaper and this provides an inducement to individuals and businesses to borrow, to spend and to invest. If as a result of this the aggregate demand rises and total expenditure is increased, the supply of money goes up and there is an expansionary effect. the government can increase its own expenditure. By raising transfer pay-ments it can transfer resources by means of benefits to lower income groups that have a higher propensity to consume than the taxpayers with higher incomes. The increased public expenditure will set the multiplier effect in motion and help to stimulate the economy (see p. 29). Contractionary policy. This is applied to check inflation, which has been defined by Hugh Dalton (a chancellor of the exchequer) in the now famous phrase, Too much money, chasing too few goods'. Fiscal and monetary measures need, therefore, to reduce the amount of money in circulation or to increase the supply of goods to restore the equilibrium.
eBook - PDFEconomics for Investment Decision Makers
Micro, Macro, and International Economics
- Christopher D. Piros, Jerald E. Pinto(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
However, fiscal policy suffers from two further issues with regard to its use in the short run. As we saw earlier, it is difficult to implement quickly because spending on capital projects takes time to plan, procure, and put into practice. In addition, it is politically easier to loosen fiscal policy than to tighten it; in many cases, automatic stabilizers are the source of fiscal tightening, because tax rates are not changing and political opposition is muted. Similarly, the independence of many central banks means that decisions on raising interest rates are outside the hands of politicians and thus can be made more easily. The interaction between monetary and fiscal policies was also implicitly evident in our discussion of Ricardian equivalence because if tax cuts have no impact on private spending as individuals anticipate future higher taxes, then clearly this may lead policy makers to favor monetary tools. Ultimately, the interaction of monetary and fiscal policies in practice is an empirical question, which we touched on earlier. In their detailed research paper using the IMF’s Global Integrated Monetary and Fiscal Model (International Monetary Fund 2009), IMF researchers Chapter 7 Monetary and Fiscal Policy 393 examined four forms of coordinated global fiscal loosening over a two-year period, which will be reversed gradually after the two years are completed. These are: 1. An increase in social transfers to all households. 2. A decrease in tax on labor income. 3. A rise in government investment expenditure. 4. A rise in transfers to the poorest in society. The two types of monetary policy responses considered are: 1. No monetary accommodation, so rising aggregate demand leads to higher interest rates immediately. 2. Interest rates are kept unchanged (accommodative policy) for the two years. The following important policy conclusions from this study emphasize the role of policy interactions: No monetary accommodation.
eBook - PDFMacroeconomics
Principles and Policy
- William Baumol, Alan Blinder(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 11 Managing Aggregate Demand: Fiscal Policy 223 h ow far the U.S. econom y was from full emplo y ment. Some ar g ued we were basicall y there alread y . Others insisted that f ull emplo y ment came at a rate substantiall y lower than 6 percent. That debate g oes on . A fourth complication is that fiscal policy “bullets” travel slowly: Tax and spending policies a ff ect a gg re g ate demand onl y a f ter some time elapses. Consumer spendin g , f or example, ma y take months to react to an income-tax cut. Because of these time la g s, fiscal policy decisions must be based on forecasts o f the f uture state o f the econom y — f orecasts that are o f ten inaccurate. The combination o f lon g la g s and poor f orecasts ma y occasionall y leave the g overnment fi g htin g the last recession j ust as the new inflation g ets under wa y . And, f inall y , the people aimin g the f iscal “ri f le” are not skilled economic technicians; the y are politicians. Sometimes political considerations lead to policies that deviate mark -edl y from what textbook economics would su gg est. Even when the y do not, the wheels o f Con g ress g rin d s l ow ly. In addition to all of these operational problems, le g islators tr y in g to decide whether to push the unemployment rate lower would like to know the answers to two f urther questions. First, b ecause either hi g her spendin g or lower taxes will increase the g overnment’s bud g et de f icit, w hat are the lon g -run costs of runnin g lar g e bud g et deficits? This is a question we will take u p in depth in Chapter 16. Second, how lar g e is the in f lationar y cost likel y to be? As we know, an expansionar y f iscal polic y that reduces a recessionar y g ap b y increasin g a gg re g ate demand w ill lower unemplo y ment. As Fi g ure 4 reminds us, it also tends to be inflationar y .
eBook - PDF- John E. Marthinsen(Author)
- 2020(Publication Date)
- De Gruyter(Publisher)
Furthermore, getting these pieces of legislation passed can be challenging to accomplish in the short term. 380 Chapter 13 Fiscal Policy Increasing Tax Rates Raising tax rates is another way to reduce a nation ’ s aggregate demand. If they are imposed on household incomes, the reduced disposable (i.e., after-tax) in-comes cause personal consumption expenditures to fall. As consumption falls, so does aggregate demand. When higher tax rates are imposed on business profits, gross private domestic investment decreases as companies reduce their real investments. In addition, the reduction in after-tax profits cuts dividends and capital gains that, otherwise, would have flowed to the household sector, again, reducing demand. Lower consumption and investment expenditures reduce aggregate de-mand, which lowers production and further reduces household income levels. As household earnings fall, so do their purchases of goods and services, which leads to subsequent rounds of spending cuts and slashed production (i.e., via the fiscal multiplier effect). These cascading rounds of lower demand and in-come wind their way through the economy until equilibrium is eventually re-stored at a lower level of GDP. If successful, contractionary fiscal policies result in lower prices and reduced inflation. At the same time, they may also reduce real GDP, causing unemployment to rise. Lags in Fiscal Policy There is considerable controversy about the effectiveness of discretionary fiscal policies. Among the main reasons for concern and skepticism are its long and variable lags. Fiscal policies have the same three generic lags as monetary policy, namely, the recognition lag, implementation lag, and impact lag, but the dura-tions of these lags can vary substantially from period to period, and they can be quite different from their monetary counterparts.
eBook - PDF- Alan S. Blinder(Author)
- 2013(Publication Date)
- Academic Press(Publisher)
Policy seems to have proceeded exacfly as if the economy were experi-encing a continuing inflafion fueled by excessive aggregate demand—the sort of inflation that can be combatted successfully by contractionary fiscal (and monetary) policy. While this assessment was probably accu-rate in 1972 and early 1973, it was painfully inappropriate after late 1973, when the economy was mainly adjusting to several large one-time shocks to the price level coming from the supply side. In my view, the economy paid a high price for this misjudgment. Worse yet, the lesson of 1973-1974 has apparently not been learned. 1 6 8 Fiscal Policy a n d t h e G r e a t S t a g f l a t i o n dRt -j and that the distributed lag response of Ct to S -j is given by γ , = λνν,+ (1 -)ßj (A.3) while the tax remains on the books, and by after the legislation lapses. One further complication must be dealt with here, and can be explained best by an example. Suppose a special tax is on the books from period k to period k + τ (i.e., for τ + 1 periods) and consider how S^ affects spending. During the τ + 1 periods in which the tax is in effect, the model assumes that consumers apply the following marginal propensities to consume (MFC's): τ τ ro + yi + -^ yr = Σ ßj-^ (^j -ßj) j = 0 j = 0 by Eq. (A.3). If they then started treating 5^ as a windfall loss, a naive application of the model would state that consumers cut spending by an additional ßr^l + ßt + 2-^ + ßn in the remaining quarters. In that case, however, the total MFC out of 5;^ would be η τ η Σ (y^j-ßj)* Ißj-j = 0 j = 0 j = 0 Since this inequality is unreasonable in theory, it is necessary to adjust the /3r+i, . . . , /3n downward to make the sum correct. Thus, once a special tax is off the books, I assume that the distributed lag spending weights attached to it are y i = ocißi.
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
