Matakuliah
Tahun
: J0594-Teori Ekonomi
: 2009
FISCAL POLICY, DEFICITS AND DEBT
Pertemuan 9
Fiscal Policy and the AD-AS Model
• Expansionary Fiscal Policy
Increased Government Spending
Tax Reductions
Some Combination of the Two
• Contractionary Fiscal Policy
– Decreased Government Spending
– Increased Taxes
– Some Combination of the Two
Bina Nusantara University
3
Fiscal Policy and the AD-AS Model
Recessions
Decrease
Aggregate
Demand
Contractionary Fiscal Policy
$5 Billion
Initial Decrease
In Spending
Price Level
AS
Full $20 Billion
Decrease in
Aggregate Demand
P1
AD4
AD3
Bina Nusantara University
$510
$522
Real Domestic Output, GDP
4
Fiscal Policy and the AD-AS Model
Expansionary Fiscal Policy
Full $20 Billion
Increase in
Aggregate Demand
Price Level
$5 Billion
Additional
Spending
AS
Recessions
Decrease
Aggregate
Demand
P1
AD1
AD2
Bina Nusantara University
$490
$510
Real Domestic Output, GDP
5
Built-In Stability
• Economic Importance
• Tax Progressivity
• Automatic or Built-In Stabilizers
– Progressive Tax System
– Proportional Tax System
– Regressive Tax System
Bina Nusantara University
6
Built-In Stability
Government Expenses, G
and Tax Revenues, T
T
Bina Nusantara University
Surplus
G
Deficit
GDP1
GDP3
GDP2
Real Domestic Output, GDP
7
Evaluating Fiscal Policy
•
•
•
•
•
Standardized Budget (Full-Employment Budget)
Cyclical Deficit
Recent U.S. Fiscal Policy
Budget Deficits and Projections
Social Security Considerations
Bina Nusantara University
8
Evaluating Fiscal Policy
Government Expenses, G
and Tax Revenues, T
T
$500
$450
Bina Nusantara University
a
b
G
c
GDP2
(Year 2)
GDP1
(Year 1)
Real Domestic Output, GDP
9
Evaluating Fiscal Policy
Government Expenses, G
and Tax Revenues, T
T1
T2
$500
d
e
$475
$450
$425
Bina Nusantara University
G
h
f
g
GDP4
GDP3
(Year 4)
(Year 3)
Real Domestic Output, GDP
10
The Public Debt
• National or Public Debt $7.96 Trillion
• Ownership
– U.S. Securities
– 42% Owned by Federal Government and
Federal Reserve
– 58% Held Outside the Federal Government
and Federal Reserve
Graphically…
Bina Nusantara University
11
The Public Debt
Debt Held Outside
The Federal
Government
and Federal
Reserve (49%)
Total Debt
$7.96 Trillion
Other – Including
State and Local
Governments
U.S. Banks
And other
Financial
Institutions
8%
Debt Held by the
Federal Government
and Federal
Reserve (51%)
8%
9%
Federal
Reserve
25%
Foreign
Ownership
8%
Bina Nusantara University
U.S.
Individuals
42%
U.S.
Government
Agencies
12
Source: U.S. Treasury
Debt and GDP
• Interest Charges
• False Concerns
–
–
–
–
Bina Nusantara University
Bankruptcy
Refinancing
Taxation
Burdening Future Generations
13
Debt and GDP
• Substantive Issues
–
–
–
–
Income Distribution
Incentives
Foreign-Owned Public Debt
Crowding-Out Effect Revisited
Graphically…
Bina Nusantara University
14
Debt and GDP
The Investment Demand Curve and the Crowding-Out Effect
A Large Public Debt to Finance Public Investment Will Cause…
16
If Public Spending
Spurs More Private
Investment Will
Increase to ID2
Real Interest Rate (Percent)
14
12
b
10
c
8
a
6
Interest Rate
Rise Will
4
Decrease
2 Investment
a to b
0
5
10
CrowdingOut Effect
ID2
ID1
15
20
25
30
35
Bina Nusantara University
Investment Demand (Billions of Dollars)
40
15
Debt and GDP
• Public Investments and Public-Private
Complementarities
• Public Investments
– Public Goods Spending
– Human Capital Spending
– Reduction on Crowding-Out Effect
Bina Nusantara University
16