Chapter 13
Fiscal Policy
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Discretionary Fiscal Policy
• Fiscal Policy
– The discretionary changes in government
expenditures and/or taxes in order to achieve
certain national economic goals, such as:
• High employment (low unemployment)
• Price stability
• Economic growth
• Improvement of international payments balance
13-2
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Discretionary Fiscal Policy
(cont'd)
• An increase in government spending will
stimulate economic activity
• Changes in government spending
– Military spending
– Education spending
– Budgets for government agencies
13-3
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Discretionary Fiscal Policy
(cont'd)
• Change in taxes
– A rise in taxes causes a reduction in aggregate
demand because it can reduce consumption
spending, investment expenditures, and net
exports.
13-4
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Possible Offsets to Fiscal Policy
• Fiscal policy does not operate in a vacuum
and important questions must be answered.
– How are expenditures financed and by whom?
– If taxes are increased what does government do
with the taxes?
– What will happen if individuals worry about
increases in future taxes?
13-5
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Possible Offsets to Fiscal Policy
(cont'd)
• Crowding-Out Effect
– The tendency of expansionary fiscal policy to
cause a decrease in planned investment or
planned consumption in the private sector; this
decrease normally results from the rise of
interest rates.
13-6
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Figure 13-3 The Crowding-Out
Effect, Step by Step
13-7
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