Fiscal policy 2012

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Oct 28, 2013 (3 years and 5 months ago)

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Copyright


2004 McGraw
-
Hill Australia Pty Ltd

PPTs t/a
Macroeconomics
7/e by Jackson and McIver

Slides prepared by Muni Perumal, University of Canberra, Australia


9
-
1


Fiscal Policy


2012

Copyright


2004 McGraw
-
Hill Australia Pty Ltd

PPTs t/a
Macroeconomics
7/e by Jackson and McIver

Slides prepared by Muni Perumal, University of Canberra, Australia


9
-
2

Learning Objectives


Discuss the implications of and
complications associated with fiscal policy
within the aggregate demand

aggregate
supply framework

Copyright


2004 McGraw
-
Hill Australia Pty Ltd

PPTs t/a
Macroeconomics
7/e by Jackson and McIver

Slides prepared by Muni Perumal, University of Canberra, Australia


9
-
3

Federal Government
Finance


Federal expenditures


large expenditure on social security and welfare


specific purpose grants


Federal revenues


Personal income tax


Company income tax


Indirect and other taxes


GST


excise tax

Copyright


2004 McGraw
-
Hill Australia Pty Ltd

PPTs t/a
Macroeconomics
7/e by Jackson and McIver

Slides prepared by Muni Perumal, University of Canberra, Australia


9
-
4

Discretionary Fiscal Policy


The deliberate manipulation of taxes and
spending by government for the purpose
of altering real GDP and employment,
controlling inflation and stimulating
economic growth


Not all fiscal policy is deliberate, a range
of automatic stabilisers are discussed
later

Copyright


2004 McGraw
-
Hill Australia Pty Ltd

PPTs t/a
Macroeconomics
7/e by Jackson and McIver

Slides prepared by Muni Perumal, University of Canberra, Australia


9
-
5

Expansionary Fiscal Policy


Increased government spending or
lower taxes or increased transfer
payments (social security payments)
to reduce the effects of recession, i.e.
boost GDP and reduce unemployment

Copyright


2004 McGraw
-
Hill Australia Pty Ltd

PPTs t/a
Macroeconomics
7/e by Jackson and McIver

Slides prepared by Muni Perumal, University of Canberra, Australia


9
-
6

Expansionary Fiscal Policy

AS
L
S

Q
p

Price level

Real gross domestic product

AS
1

AD
2

Q
1

AD
1

P
1

Q
2

P
2

Copyright


2004 McGraw
-
Hill Australia Pty Ltd

PPTs t/a
Macroeconomics
7/e by Jackson and McIver

Slides prepared by Muni Perumal, University of Canberra, Australia


9
-
7

Contractionary Fiscal
Policy


Decreased government spending or
higher taxes or a reduction in transfer
payments in order to reduce inflation
during a boom

Copyright


2004 McGraw
-
Hill Australia Pty Ltd

PPTs t/a
Macroeconomics
7/e by Jackson and McIver

Slides prepared by Muni Perumal, University of Canberra, Australia


9
-
8

Contractionary Fiscal Policy

AS
L
S

Q
p

Price level

Real gross domestic product

AS
1

AD
1

Q
1

AD
2

P
1

P
2

Copyright


2004 McGraw
-
Hill Australia Pty Ltd

PPTs t/a
Macroeconomics
7/e by Jackson and McIver

Slides prepared by Muni Perumal, University of Canberra, Australia


9
-
9

Non
-
Discretionary Fiscal
Policy


Built
-
in or automatic stabilisers that operate
without requiring explicit action by policy
-
makers,
they are the result of a progressive income taxes
and a social security system


During recessions: Tend to increase government
deficits (or reduce surplus) through lower taxes
and higher welfare payments


During inflationary periods: Tend to increase
government surpluses (or reduce deficits) through
higher taxes and lower welfare payments

Copyright


2004 McGraw
-
Hill Australia Pty Ltd

PPTs t/a
Macroeconomics
7/e by Jackson and McIver

Slides prepared by Muni Perumal, University of Canberra, Australia


9
-
10

Automatic or Built
-
in
Stabilisers


Tax receipts: Increase as real GDP increases,
so the economy slows


Transfers: Decrease as real GDP increases, but
increase when the economy slows so GDP and
AD increase.


Do not fully correct the economy, only reduces
the severity of fluctuations


Useful when economy is operating around full
employment


Can cause problems: Fiscal Drag

Copyright


2004 McGraw
-
Hill Australia Pty Ltd

PPTs t/a
Macroeconomics
7/e by Jackson and McIver

Slides prepared by Muni Perumal, University of Canberra, Australia


5
-
11

Automatic or Built
-
in Stabilisers

Level of business activity

Time

Flatten out the fluctuations in the business
cycle, but do not eliminate them completely

Copyright


2004 McGraw
-
Hill Australia Pty Ltd

PPTs t/a
Macroeconomics
7/e by Jackson and McIver

Slides prepared by Muni Perumal, University of Canberra, Australia


9
-
12

Problems with Fiscal
Policy in Practice


Problems of timing


Recognition lags


Administrative lags


Operational lags


Political problems


Other economic goals, economic growth
complements and conflicts with other policies


Expansionary bias, often not used stimulate rather
than slow the economy


The political cycle may accentuate the business cycle.

Copyright


2004 McGraw
-
Hill Australia Pty Ltd

PPTs t/a
Macroeconomics
7/e by Jackson and McIver

Slides prepared by Muni Perumal, University of Canberra, Australia


9
-
13

Fiscal Policy and
Aggregate Supply


Fiscal policy, especially tax changes, affects not
only aggregate demand but can affect
aggregate supply


Tax changes in the form of incentives to
businesses and individuals as well as
government spending in infrastructure can lead
to a rightward shift in the AS in addition to
increasing AD, providing a further stimulus to
the economy in terms of lower prices and higher
GDP

Copyright


2004 McGraw
-
Hill Australia Pty Ltd

PPTs t/a
Macroeconomics
7/e by Jackson and McIver

Slides prepared by Muni Perumal, University of Canberra, Australia


9
-
14

Supply
-
Side Effect of Fiscal Policy

AS
LS

Q
p

Price level

Real gross domestic product

AS
1

AD
2

Q
1

AD
1

P
1

AS
2

Q
2

P
2

P
3 =

Q
3