Kodo Millet PPT made by Ghanshyam bairwa college of Agriculture kumher bhara...
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Mpp#018+fiscal.policy.&.the.multiplier.(12)
1. Fiscal Policy &
the Expenditure Multiplier
tracking MacroEconomic
Trends and Statistics and
evaluating the impact of
government related activities
1
2. Unemployment
Seasonally Adjusted Monthly Unemployment
Rate, from January 1984 to December 2004
Unemployment Rate
10
9
8
7
(%)
6
5
4
3
2
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
8
8
8
9
9
9
9
0
0
9
0
4
8
4
6
8
2
4
6
0
2
0
Month
2
6. Fiscal Policy
âą Changes in government spending and
changes in taxation influence the
level of economic activity
â Increases in taxes contract the economy
â Decreases in taxes stimulate the
economy
â Increases in government spending will
stimulate the economy
â Decreases in government spending will
contract the economy
âą together the President and Congress
determine fiscal policy
6
7. Government Spending or Taxes?
âą why do changes in (âGâ) government
spending levels have greater impact
on the economy than changes in
(âTâ) taxation levels
â Government spending is direct
â Taxes depend on what consumers do
with the tax cut. What they would have
done with the money going to support
the levels of taxes (how much would
they consume or how much would they
save of the changing marginal funds)
7
8. Crowding Out
âą Government increases spending
âą Government finances the spending by
borrowing in credit market
âą the interest rates go up
âą the rate and amount of private
investment falls
âą the increase in government spending
is offset by a decrease in private
investment
8
9. The Expenditure Multiplier
âą There is a change in spending
âą The change in spending becomes a
change in income for others
âą Those changes in income become
spending
âą The change in spending becomes a
change in income for others
âą then the same process happens again
and again and againâŠâŠ.
9
10. Main Points ~ page i
âą Three (3) MacroEconomic goals
â are: (i) Full employment; (ii)
economic growth; and (iii) price
stability
âą Discretionary Fiscal Policy is the
use of changes in government
spending and taxation rates to
influence the level of economic
activity
10
11. Main Points ~ page ii
âą using the Expenditure Multiplier
a change in initial spending is
multiplied to cause greater
changes in spending levels
âą remember changes in G have
more direct and greater impact
on spending levels than changes
in T
11
12. Main Points ~ page iii
âą the Government runs a deficit when
spending is greater than tax receipts
in a given year
âą the amount of Government Debt is
the accumulation of annual deficits
âą the Crowding Out effect occurs when
government spending is financed by
private borrowing and raises interest
rates thereby crowding out private
investment
12