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| QUICK REVIEW 12-1 |
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- The Employment Act of 1946 commits the Federal
government to promoting "maximum employment
production
and purchasing power."
- Discretionary fiscal policy is the purposeful
change of government expenditures and tax collections by government to promote full
employment
price stability
and economic growth.
- Government uses expansionary fiscal policy to
shift the aggregate demand curve rightward--that is
to stimulate spending and expand real
output. This policy involves increases in government spending
reductions in taxes
or
some combination of the two.
- Government uses contractionary fiscal policy to
shift the aggregate demand curve leftward in an effort to halt demand-pull inflation. This
policy entails reductions in governmentspending
tax increases
or some combination of the
two.
- The expansionary effect of fiscal policy is
greater when the budget deficit is financed through money creation rather than via
borrowing; the contractionary effect of the creation of a budget surplus is greater when
the budget surplus is impounded rather than used for debt reduction.
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| QUICK REVIEW 12-2 |
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- Tax revenues automatically increase in economic
expansions and decrease in recessions; transfers automatically decrease in expansions and
increase in recessions.
- Automatic changes in taxes and transfers add a
degree of built-in stability to the economy.
- The full-employmentbudget compares government
spending to the tax revenues which would accrue if there were full employment; changes in
it are more useful than changes in the actual budget in revealing whether fiscal policy is
expansionary
neutral
or contractionary.
- Full-employment budget deficits are also called
structural deficits and are distinct from cyclical deficits.
- A strict mandate to balance the budget annually
would intensify recession by requiring contractionary tax increases and government
spending cuts.
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| QUICK REVIEW 12-3 |
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- Time lags and political problems complicate
fiscal policy.
- The crowding-out effect indicates that an
expansionary fiscal policy may increase the interest rate and reduce investment spending.
- The upsloping range of the aggregate supply curve
means that part of an expansionary fiscal policy may be dissipated in inflation.
- Fiscal policy may be weakened by the net export
effect
which works through changes in (a) the interest rate
(b) the international value
of the dollar
and (c) exports and imports.
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