CH07FISCALPOLICY打印稿.pptVIP

CH07 FISCAL POLICY FISCAL POLICY Refers to changes in government expenditures and/or taxes to achieve particular economic goals, such as low unemployment, price stability, and economic growth. Government expenditures is the sum of government purchases and transfer payments. FISCAL POLICY Fiscal policy influences saving, investment, and growth in the long run. In the short run, fiscal policy primarily affects the aggregate demand. When policymakers change the money supply or taxes, the effect on aggregate demand is indirect—through the spending decisions of firms or households. When the government alters its own purchases of goods or services, it shifts the aggregate-demand curve directly. Changes in Government Purchases There are two macroeconomic effects from the change in government purchases: The multiplier effect The crowding-out effect The Multiplier Effect Government purchases are said to have a multiplier effect on aggregate demand. Each dollar spent by the government can raise the aggregate demand for goods and services by more than a dollar. The multiplier effect refers to the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending. The Multiplier Effect A Formula for the Spending Multiplier The formula for the multiplier is: Multiplier = 1/(1 - MPC) If the MPC is 3/4, then the multiplier will be: Multiplier = 1/(1 - 3/4) = 4 In this case, a $20 billion increase in government spending generates $80 billion of increased demand for goods and services. The Crowding-Out Effect Fiscal policy may not affect the economy as strongly as predicted by the multiplier. An increase in government purchases causes the interest rate to rise. A higher interest rate reduces investment spending. This reduction in demand that results when a fiscal expansion raises the interest rate is called the crowding-out effect. The crowding-out effect tends to dampen the effects of fiscal