CHAPTER 15 (2014)Apunte Inglés
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ECONOMICS. CHAPTER 15
The government receives money from taxes and the debt —> The government spends this money (investment).
*Some countries spend less and some countries spend more - The role of the government in the economy is very important.
*The spending of the government affects the economy.
GOVERNMENT INCOME AND SPENDING.
GOVERNMENT: 1-Federal governments 2-Estate governments 3-Local governments INCOME: Taxes, borrowing and asset selling.
SPENDING: Social policies, education, military and security and infrastructure.
FISCAL POLICY — Use of taxes, government transfers, or government purchases of goods and services to shift the aggregate demand curve.
1-EXPANSIONARY FISCAL POLICY: Used to increase aggregate demand to eliminate a recessionary gap.
-Increase in government spending -Cut in taxes -Increase in government transfers *Example: The American recovery & reinvestment act of 2009.
2-CONTRACTIONARY FISCAL POLICY: Used to reduce the aggregate demand and to eliminate a inflationary gap.
-Reduction in government spending -Increase in taxes -Reduction in government transfers *Example: Spanish contractionary Fiscal Policy in May 2010.
CLAIMS AGAINST FISCAL POLCY.
1.Government spending always crowds out private spending.
*Every dollar that the government spends is a dollar taken away from private sector.
2.Government borrowing always crowds out private investment spending.
ECONOMICS. CHAPTER 15 3.Government budget deficits lead to reduced private spending.
*Consumers prefer to save as they know that if the government increases his debt there will be more taxes in the future.
LAGS IN FISCAL POLICY.
-The recessionary/inflationary gap by collecting and analyzing economic data takes time.
-The government to develop a spending plan takes time.
-Implementation of the action plan (spending money) takes time.
*Expansionary fiscal policy —> Increase in real GDP larger than the initial rise in aggregate spending caused by the policy.
*Contractionary fiscal policy —> Fall in real GDP larger than the initial reduction in aggregate spending caused by the policy.
IT HAS A CHAIN REACTION — MARGINAL PROPENSITY TO CONSUME.
HOW TAXES AFFECT THE MULTIPLIER? -Automatic stabilizers: Reduce the size of the multiplier and automatically reduce the size of fluctuations in the business cycle.
-Discretionary fiscal policy: Arises from the deliberate actions by policy makers rather than from the business cycle.
ECONOMICS. CHAPTER 15 THE BUDGET BALANCE.
Expansionary fiscal policy: Makes a budget surplus smaller or a budget deficit bigger.
Contractionary fiscal policy: Increases the budget balance for that year, making a budget surplus bigger or a budget deficit smaller.
THE CYCLICALLY ADJUSTED BUDGET BALANCE.
In order to separate the effects of the business cycle from the effects of discretionary fiscal policy, governments estimate the cyclically adjusted budget balance —> estimate of the budget balance if the economy were at potential output.
During the last 2 decades the fiscal rules have increased notably.
47 countries that are part of monetary unions —> Stability legislations.
GOAL: Limit the possibility that monetary union member countries pursue fiscal policies not consistent with the monetary union policies.
-Public Deficit Limit -Public Debt Limit -Non financial expenditure limits DIFFERENCE BETWEEN DEBT AND DEFICIT.
DEFICIT = Amount of money the government spends — Amount of money the government receives in taxes over a given period.
DEBT = SUM of the money a government owes during a particular point in time.
*Deficit and debt are linked because as government runs deficit, there is a growth in debt.
Public debt —> Crowd out investment spending —> Reduces long-run economic growth.
Rising debt —> Government default —> Economic and financial turmoil.
ECONOMICS. CHAPTER 15 IMPLICIT LIABILITIES.
Spending promises made by governments that are effectively a debt despite the fact that they are not included in the usual debt statistics.