Fiscal Policy and the AD-AS Model
- Expansionary fiscal policy
- Contractionary fiscal policy
- Policy options: G or T?
Problems, Criticisms, and Complications
- Problems of timing
- Political considerations
- Future policy reversals
- Crowding-out effect
The Public Debt
- Ownership
- Debt and GDP
- International comparasons
- Interest charges
Substantive Issues relating to the Debt
- Income distribution
- Incentives
- Foreign-owned public debt
- Crowding-out effect
| Above: To a certain degree, fiscal policy is automatic, rather than discretionary. In other words, it does not require the government to convene and create an expasionary or contractionary plan.
- This is because the amount of taxes collected automatically decline as GDP falls, since most taxes are income taxes.
- Lower national income means lower taxes.
- Likewise, as GDP falls government spending on transfer payments such as welfare, foodstamps, unemployment benefits, Medicare, and other "social" programs will increase, since lower incomes mean more people out of work and below the poverty line.
- This way, recessions automatically lead to more G and less T;
- On the other hand, booming GDP means higher T and less G, resulting in built-in stability.
Below: As can be seen, America's tax system is highly progressive, meaning people with higher incomes pay a greater proportion of their incomes to the government in the form of taxes.
|
