fiskal policy.pptx

7/30/2019 FISKAL POLICY.pptx

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FISKAL POLICY


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Fiskal policy is

Fiskal policy is the setting of the federal budget

and thus comparises decisions on goverment

spending and taxation.

In the consideration of the classical view of fiscalpolicy, it is conveniet to begin with government

spending


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Government spending

Like a business or household, the government

has a budget constraint, a condition that states

that all expenditures must be financed from

some source, the goverment has three sources :

taxation, selling bonds to public, or creating

money


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To increase spending, then the goverment must incrase

taxation, sell additional bonds to the public, or increase themoney supply, for now, to avoid bringing in a monetary

policy change, we assume the money supply to be fix, we

also assume that tax colections are fixed, the incrasedgovernment expenditures are therefore assumed to

financed by selling bonds to the public

The effect in the leonable funds market of an incrase in

goverment spending financed by a sale of bonds to the

public is show in figure 4.5


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Interestrate

r sg

r1

r0 B A

i + g

i

s,i, g ti1 i0 = s0 s1

Loanable funds


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TAX POLICY

1. Demand side effects

As long as we consider only the possible effects on aggregate

demand, analysis of a change in taxes produces results

that are analogous to those for government spending. For

example by increase the disposable income of household,

a tax cut might stimulate consumption demand. If

however the government sold bonds to the public to

replace the revenues lost by the tax cut


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If revenue lost because of tax cut are replace by

printing new money, then, as with an increase in

government spending. The money creation will

increase aggregate demand


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2. Supply side effects

If the tax were simply a lump sum cut, meaning,

for example, that every household received a tax

cut of $100, then the demand side effects

would be all that we would need to consider. But

suppose the tax cut was in the form of a

reduction in income tax rates. Suppose the

marginal income tax rate were cut from an initial

rate of 40 percent to a new rate of 20 percent.


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Instead of having 40 cents of every additional

dolar taken as a tax payment, only 20 cents

would now be taken. In the classical model such

a change would have an incentive effect on laborsupply. The change would effect the supply side

of the model and would effect output and

employment


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Labor market equilibrium

wp N (ty = 0,40 )

N (ty = 0,20 )

WP

W

P

Nd

N

N0 N1


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Output determined along the production function

y

F ( K , N )

Y1

Y0

N0 N1


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Aggregat supply and demand

p

ys (ty = 0,20 )

ys (ty = 0,20 )

p0

p1

yd

y

y0 y1

fiskal policy.pptx

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