Chapter 12 Fiscal Policy.pptVIP

Fiscal Policy Budget Deficits Surpluses The Keynesian View of Fiscal Policy Fiscal Policy and the Crowding-out Effect The New Classical View of Fiscal Policy Fiscal Policy Changes and Problems of Timing Fiscal Policy as a Stabilization Tool: A Modern Synthesis Supply-side Effects of Fiscal Policy Fiscal Policy of the United States EndChapter 12 Fiscal Policy: A Modern Synthesis A modern synthesis view about the efficacy of fiscal policy emerged from the economic debates of the 1970s and 1980s. The key elements of that view are: Proper timing of discretionary fiscal policy is both difficult to achieve and of crucial importance. Automatic stabilizers reduce the fluctuation of aggregate demand and help to direct the economy toward full-employment. Fiscal policy is much less potent than the early Keynesian view implied. Each of the 3 demand-side models of fiscal policy is valid under some circumstances but not others. Thus, all 3 are necessary for a comprehensive view of fiscal policy. Questions for Thought: 1. Why is the proper timing of changes in fiscal policy so important? Why is it difficult to achieve? 2. Which of the following will make it more difficult to institute discretionary changes in fiscal policy in a manner that will exert a stabilizing impact on the economy? a. the lengthy time period required for passage of a fiscal policy change under a political system with substantial checks and balances b. improvements in forecasting devices that provide information about the future direction of the economy Questions for Thought: 3. “Both the crowding out and new classical  views indicate fiscal policy is substantially  less potent than the Keynesian view implies.”  -- Is this statement true? 4. Automatic stabilizers are government programs that tend to:a. bring expenditures and revenues automatically  into balance without legislative action.b. shift the budget toward a deficit when the  economy slows but shift it towards a surplu