econ home work

Outline for Lecture 15

Fiscal Policy and the ADAS Model

Expansionary Fiscal Policy

When a recession occurs, the government may carry out expansionary fiscal policy actions that are designed to increase aggregate demand and therefore raise real_GDP___.

For a graphical example, suppose that the economy is initially operating at full employment, as shown by Figure 33.1, producing the potential GDP of $510 at price level P1.

Suppose further that a negative demand shock (i.e. decrease in AD) occurs. Provide an example of a negative demand shock. To which direction does the AD curve shift as a result?

The shift of AD curve results in a recession: output falls from its potential of $510_B___ to _$490_B__; price level P1____ due to downward price stickiness.

There are two expansionary fiscal policy paths to full recovery.

1. Increased Government Spending

Suppose that the government raises spending on infrastructure projects. To which direction does the AD curve shift as a result of higher spending and the following multiplier process?

In the final equilibrium, which occurs at the intersection of AD1____ and __AS__, output returns to the potential GDP of _$510___ and price level is __P1__.

2. Tax Reductions

Alternatively, suppose that the government cuts taxes on personal income. To which direction does the AD curve shift as a result of falling taxes and the following multiplier process?

In the final equilibrium, which occurs at the intersection of AD1____ and __AS__, output returns to the potential GDP of _$510___ and price level is _P1___.

Contractionary Fiscal Policy

When demand-pull inflation occurs, the government may carry out contractionary fiscal policy actions to _control it___.

For a graphical example, suppose that the economy is initially operating at full employment, as shown by Figure 33.2, producing the potential GDP of $510 at price level P1.

Suppose further that a positive demand shock (i.e. increase in AD) occurs. Provide an example of a positive demand shock. To which direction does the AD curve shift as a result? Example of positive demand shock : decreased interest rate AD curve shifts to the right

The shift of AD curve results in an inflationary GDP gap: output rises from its potential of _$510_billion__ to __$522billion __; price level rises from _P1___ to _P2___.

There are two contractionary fiscal policy paths to price stability.

1. Decreased Government Spending

Suppose that the government reduces spending on healthcare. To which direction does the AD curve shift as a result of falling government spending and the following multiplier process?

In the final equilibrium, which occurs at the intersection of _AS___ and _AD5___, output returns to the potential GDP of _$510 billion___ while price level __ p2__ due to downward price stickiness.

2. Increased Taxes

Alternatively, suppose that the government raises taxes on corporate income. To which direction does the AD curve shift as a result of rising taxes and the following multiplier process?

In the final equilibrium, which occurs at the intersection of _AS___ and __AD5__, output returns to the potential GDP of _$510___ while price level __P2__ due to downward price stickiness.

Outline for Lecture 16

Recent and Projected U.S. Fiscal Policy

The budget balance in a given year, surplus or deficit, is determined by the levels of government spending and tax collections in that year.

For example, if government spending exceeds tax collections, the government is said to run a budget _deficit___.

By contrast, if tax collections exceed government spending, the government is said to run a budget surplus____.

The second column of Table 33.1 reports the actual budget deficits/surpluses for the U.S. federal government as percentage of GDP for the period from 2000 to 2018.

What was the budget balance in 2000? How about 2001? What does the positive sign indicate? surplus

Report the budget balances for all remaining years.

2002	-1.4	-0.8
2003	-3.3	-2.4
2004	-3.4	-2.9
2005	-2.5	-2.3
2006	-1.8	-1.9
2007	-1.1	-1.3
2008	-3.1	-2.9
2009	-9.3	-7.6
2010	-8.3	-6.4
2011	-8.1	-6.5
2012	-6.6	-5.3
2013	-4.0	-2.8
2014	-2.7	-1.8
2015	-2.4	-1.9
2016	-3.1	-2.7
2017	-3.4	-3.1
2018	-3.9	-3.9

What does the negative sign indicate? deficit

Why do we observe a large increase in deficits during the late 2000s? the economy slide in to recession Explain.the recession lead to high unemployment rate and low incomes this made the economy suffer

Problems, Criticisms, and Complications

Problems of Timing

Recognition lag

How do we define the recognition lag? is the time between the beginning of recession or inflation and the certain awareness that it is actually happening. Provide an example. During the great recession, it emerged that many European countries were saddled with huge government debts. Eg .. Greece had massive deficit

What is the impact of the recognition lag on the severity of an economic problem? Explain in your example Due to recognition lags, the economy is often several months into a recession or inflation before the situation is clearly discernible in the relevant statistics. As a result, the economic downslide or inflation may become more serious than it would have if the situation had. For instance in Greece their massive wasn’t know until 2010

Administrative lag

How do we define the administrative lag? is the time between when policymakers recognize the need for a fiscal action and when that fiscal action is actually taken. Provide an example. After terrorist attacks of September 11, 2001, the U.S. Congress was stale-mated for five months before passing a compromise economic stimulus law in March 2002.

What is the impact of the administrative lag on the severity of an economic problem? Explain in your example .administrative lag complicates fiscal policy

Operational lag

How do we define the operational lag? is the delay between the time fiscal action is ordered and the time that it actually begins to affect output, employment, or the price level. Provide an example government spending on public works—new dams, interstate highways, and so on—requires long planning periods and even longer periods of construction ..

How do operational lags in taxation compare to those in spending? Tax changes have short operational lag compared to spending . Explain in your example. government spending on public works—new dams, interstate highways, and so on—requires long planning periods and even longer periods of construction hence have a long operation lag compared to to tax changes which can be lowered instantly hence have a shorter operational lag

The U.S. Public Debt

How do we define national (public) debt? The total amount owed by the federal government to the owners of government securities;

How do budget deficits affect public debt: positively or negatively?

negatively

How do budget surpluses affect public debt: positively or negatively?

Positively

Ownership

Figure 33.5 illustrates the ownership shares in the U.S. debt of $21.5 trillion in 2018.

What is the share held by the U.S. government agencies? 27%How about the Federal Reserve?11%

What is the share held by foreign entities?29% Which foreign nations hold the largest amount of the U.S. public debt?china

The U.S. debt is large. So is the size of the U.S. economy. Therefore, a better measure of public indebtedness is the ratio of debt to GDP.

Figure 33.6 shows the U.S. debt held by public (outside of federal government) as percentage of GDP since the 1970s.

The debt/GDP ratio fluctuated between a low of _22%___ observed in _1974___ and a high of _76%___ observed in __2018__.

Why do we observe a large increase in the debt/GDP ratio during the late 2000s? because of massive annual budget deficits. Explain. the debt levels of recent years are more burdensome relative to national income than were the debt levels in earlier year

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