When you finish this chapter, you should: Define the key terms of economics and opportunity cost and understand how a production possibilities frontier exemplifies the trade-offs that exist in life, distinguish between increasing and constant opportunity cost and understand why each might happen in the real world, analyze an argument by thinking economically, while recognizing and avoiding logical traps. | Lecture Issues in economics today - Chapter 11 Chapter 11 Fiscal Policy McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Chapter Outline NONDISCRETIONARY AND DISCRETIONARY FISCAL POLICY USING FISCAL POLICY TO COUNTERACT SHOCKS EVALUATING FISCAL POLICY McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Fiscal Policy Fiscal Policy is the purposeful movement in government spending or tax policy designed to direct an economy Discretionary Fiscal Policy government spending and tax changes enacted at the time of the problem to alter the economy Nondiscretionary Fiscal Policy that set of policies that are built into the system to stabilize the economy McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. How Nondiscretionary Fiscal Policy Works Nondiscretionary fiscal policy consists of policies that are built into the system so that an expansionary or contractionary stimulus can be given automatically. The welfare state and the progressive income tax serve as the built-in policies. If the economy is in recession those who lose their jobs are granted unemployment and welfare benefits and they owe less in taxes. If the economy is growing at an unsustainable rate people are making a lot of money and are faced with higher tax rates and there are fewer people eligible for government benefits. McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. How Discretionary Fiscal Policy Works If we are in a recession the fiscal policy to stimulate the economy would consist of Increases in government spending Decreases in taxes If we are in an inflationary period the fiscal policy to contract the economy would consist of Decreases in government spending Increases in taxes McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Expansionary Fiscal Policy PI AS PI PI AD AD RGDP RGDP RGDP McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Contractionary .
