Analyze the effect of each on inflation and unemployment:Consumers expect an economic downturn

A new president is elected and the profit expectations of business executives rise

Power companies switch to solar energy causing electricity prices to fall

Federal government increases the sales tax on gasoline to balance the budget

What graphical explanation would explain following conditions?Price Level and unemployment rise

Price level falls and unemployment rises

Price level falls and unemployment stays the same

Price level remains the same and unemployment rises

Fiscal Policy

Government’s Role

Regulation of Private Market, including externalities & information

Provision of Public Goods

Institutional Stability, including courts and banks

Promoting Cultural Values

Why Provide Public Goods?Equity – Everyone should have access to 911 services

Efficiency – Economies of scale and easier to collectively provide

Overcome Free Rider problem – will not be privately providedProvide infrastructure necessary to society and economy, See Monty Python

Types of SpendingChoice or Discretionary: Funded year to

yearMandatory or Non-discretionary: Funded by

existing lawsAutomatic Stabilizers: Unemployment

and Income support

Social Security and Mandatory spending increasing as population ages and health care costs go up

Could change eligibility requirements

Defense51%

Domestic46%

International3%

Goals of Federal SpendingProvide and maintain public goods

(infrastructure)Armies, parks, highways, coastlines, banks

Promote cultural valuesEducation, health care, income redistribution

Stabilize the national economyGrowth, full employment, low inflation

Stabilizing the economyExpansionary ContractionaryDecrease taxes

Automatic rate reduction as income falls

Tax credits or breaksIncrease spending

Automatic increase through unemployment and food stamps

Discretionary programs

Increase taxesAutomatic rate increase

as income risesTax hikes or elimination

of loop holes and breaksDecrease spending

Automatic decrease through unemployment and food stamps

Discretionary programs

Vote, Veto, Vote againDiscretionary Changes Automatic StabilizersIdentification of

problem

Agreeing to a remedy

Time for Remedy to take effect

No identification

Real time corrections

-

Fiscal Policy ComplicationsCrowding out: Deficits and debts

Regulatory lags: recognition, execution and implementation

Ricardian Equivalence: No effect

TaxesThe revenue side

16th amendment

Consider tax policies:Current Marginal tax SystemHead TaxFlat TaxConsumption tax

Tax EvaluationConsider efficiency and equity

Efficiency – Does it distort behavior (dividend taxes) & is administration simple (1040 form)Equity – Is it Fair

Define fairnessBenefits Received

Revenue from gas tax goes towards road maintenanceAbility to Pay

More one makes the more one pays

Tax revenues collected with each plan

Tax Evaluation

Proportional Average tax rate same at all levels

Regressive Average tax rate decreases as

income increasesProgressive

Average tax rate increases as income increases

Tax breakshttps://www.nationalpriorities.org/interactive-

data/taxbreaks/2014/visualization/

2016 candidate tax plan comparisonhttp://apps.urban.org/features/tpccandidate/

Enter income see tax burden change with each candidate

http://www.taxpolicycenter.org/interactive-tools/vox-presidential-tax-calculator

How high is too high?

Tax vs SpendingTaxing one-time bill on the books

indefinitely – complicated tax codeSpending annual appropriation

Spending $1 same as Taxing one less $1

Both $1 in her pocket only different politically

Fiscal Policy and AD-AS

How to move the economy:Supply Side Demand Side

JB Say “Supply creates its own demand”

Long run plan

Keynes need for stimulus

Can have quick effects

AS’

AD’

Expansionary: Increase ADAutomatic Stabilizers:

Unemployment checks + lower tax bracketsDecrease taxesIncrease Spending

Expansionary: Increase ASCreate business/resource incentivesLower (certain) taxes

Contractionary: Decrease ADAutomatic Stabilizers:

Fewer unemployment checks + higher tax brackets

Increase taxesDecrease spending