Chapter 12 "Fiscal policy", after reading this chapter, you should be able to: Define what fiscal policy is, explain why fiscal policy might be needed, illustrate what the multiplier is and how it works, tell how fiscal stimulus or restraint is achieved, specify how fiscal policy affects the federal budget. | Chapter 12 Fiscal Policy Fiscal Policy Fiscal policy is the use of government taxes and spending to alter macroeconomic outcomes. The premise of fiscal policy is that the aggregate demand (AD) for goods and services will not always be compatible with economic stability. 12- Fiscal policy can be used to stimulate (or restrain) aggregate demand. Fiscal Policy Recessions occur when AD declines. Recessions persist when AD remains below the economy’s capacity to produce. 12- Technically, a recession refers only to the downturn. However, any time the economy is under performing (operating at less than full employment) is still a recession in the eyes of politicians, the press, and people in general. Fiscal Policy John Maynard Keynes explained how a deficiency in demand could arise in a market economy. Keynes showed how and why the government should intervene to achieve macroeconomic goals. Keynes also advocated aggressive use of fiscal policy to alter market outcomes. 12- John Maynard Keynes was a British economist who recommended government intervention as a way to end the Great Depression of the 1930s. The four major components of AD are: Consumption (C) Investment (I) Government spending (G) Net exports (exports minus imports) (X – IM) AD = C + I + G + (X – IM) Components of Aggregate Demand 12- Figure 12- Equilibrium Macro equilibrium is the combination of price level and real output that is compatible with both AD and AS. There is no guarantee that AD will always produce an equilibrium at full employment and price stability. Sometimes there will be too little demand, and sometimes there will be too much. 12- Equilibrium occurs where aggregate demand equals aggregate supply and the AS and AD curves intersect. Equilibrium output is not necessarily the same as the full employment level of output. Figure 12- It might be a good idea to walk slowly through this slide. First, point out the goal: full employment. . | Chapter 12 Fiscal Policy Fiscal Policy Fiscal policy is the use of government taxes and spending to alter macroeconomic outcomes. The premise of fiscal policy is that the aggregate demand (AD) for goods and services will not always be compatible with economic stability. 12- Fiscal policy can be used to stimulate (or restrain) aggregate demand. Fiscal Policy Recessions occur when AD declines. Recessions persist when AD remains below the economy’s capacity to produce. 12- Technically, a recession refers only to the downturn. However, any time the economy is under performing (operating at less than full employment) is still a recession in the eyes of politicians, the press, and people in general. Fiscal Policy John Maynard Keynes explained how a deficiency in demand could arise in a market economy. Keynes showed how and why the government should intervene to achieve macroeconomic goals. Keynes also advocated aggressive use of fiscal policy to alter market outcomes. .
