Aggregate activity and demand: Fiscal policy

6.1 Fiscal policy

Activities

MIT: Veronica Guerrieri's "Principles of Macroeconomics, L18-L19: Fiscal Policy"

• Read these lecture notes, which provide important details regarding fiscal policy, its complexities, and its potential.

Principles of Macroeconomics: "Chapter 12, Section 2: The Use of Fiscal Policy to Stabilize the Economy"

• Read this section to learn about how the government's fiscal actions influence aggregate demand. This section first discusses automatic stabilizers and how they function. It then covers discretionary fiscal policy, which are changes in aggregate demand resulting from changes in government purchases, income taxes, and transfer payments. Attempt the "Try It” exercises at the end of the section.

John Petroff's "Macroeconomics, Chapter 9: Fiscal Policy"

• Read this chapter, which identifies the policies needed when inflation and recession are present. This reading will help you gain information about government taxing and spending. This reading will also prepare you for further study on the role of government in the macroeconomy and for the assessment that accompanies the reading.
  Focus on the "Government Spending Increase” section. The government spending multiplier is a tool used to manipulate the economy and mitigate inflation or recession that goes beyond the ordinary uses of taxes. In this process, the government spending multiplier deploys additional monies or restricts monies to assist in economic stability.
  Also, focus on the "Tax Increase” section. The tax multiplier is a tool used to manipulate the economy and mitigate inflation or recession that goes beyond the ordinary uses of taxes. In this process, the tax multiplier uses the manipulation of taxes, which is known as fiscal policy.
  Be aware of the "Balanced Budget Multiplier” section. The balanced budget multiplier operates within the context of aggressively reducing a deficit by collecting more taxes to enable the government's revenue to match its expenses.

John Petroff's "Macroeconomics, Chapter 9 Quiz: Fiscal Policy"

• Click the "Review Quiz" link at the bottom of the page and follow the directions to take the quiz.

5.1.1 Stimulus and restraint

Activities

Khan Academy: "Tax Lever of Fiscal Policy"

• Watch this lecture, which discusses the tax lever of fiscal policy.

5.1.2 Issues

Activities

OpenStax College: "Macroeconomics, Chapter 17, Section 5: Automatic Stabilizers"

• Read this section, which explains actions the government enacts to adjust the economy.

Principles of Macroeconomics: "Chapter 12, Section 3: Issues in Fiscal Policy"

• Use this reading as an opportunity to become familiar with the problems and controversies involved in choosing and implementing fiscal policy. Can you think of an example of "crowding out" that you have read about?

Principles of Macroeconomics: "Chapter 11, Section 2: Problems and Controversies of Monetary Policy"

• Read only the portion of Section 2 which describes the several lags involved with the use of macroeconomic policy. Among them are the recognition lag, the decision lag, and the implementation lag. You need to place each of these lags in a timeframe and gain information about the complexity of action or inaction.

5.1.3 Budget deficits and surpluses

Activities

Phil Holden's "Fiscal Policy and Automatic Stabilizers"

• Watch this lecture for a discussion of fiscal policy and automatic stabilizers. Discretionary fiscal policy is how the executive and legislative branches exercise their choice of increasing or decreasing taxes or spending to attain economic stability. Automatic stabilizers are the non-discretionary occurrences that mitigate fluctuations in GDP. When that happens, the government automatically gains increases in revenues as a consequence of economic expansions.