...Explain how fiscal policy can be used to address a recessionary gap and discuss the merits and the consequences of the actual fiscal policy of the current administration. Why republicans are criticizing the current approach? What kind of fiscal policy are they proposing and will it work in light of the US experience? NO it will not. Democrat:”we can’t cut hour way to prosperity.Republican:”we should not increase taxes on anyone in the middle of a recession”. Fiscal Policy is described as changing the taxing and spending of the federal government for purposes of expanding or contracting the level of aggregate demand output and employment; these are designed to increase short-run economic growth. Fiscal policy is used to achieve macroeconomic objectives such as full employment, price level stability and sustained economic growth. In a recession, an expansionary fiscal policy involves lowering taxes and increasing government spending. By cutting taxes, increasing government spending programs, and increasing transfer payments, more money is in the economy, more income, and more spending. This can be done through the federal budget process; however, the problem with fiscal policy is lag time. This process can take so long (as long as a year or more) that Discretionary Fiscal Policy is very rarely used in the federal government; still, the lag between a change in fiscal policy and its effect on output tends to be shorter than the lag for monetary policy. Instead, the government...
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...Topic 4 – Fiscal Policy Refers to the governments choices regarding the overall level of government purchases or taxes * Government spending – on health sector, education, infrastructure, defence. * Taxation policy – income tax, sales tax (VAT), corporate tax, capital gains tax. Fiscal policy and aggregate demand * Government spending – increase in G spending → AD shifting right * e.g. Gov places £10 billion order for new school buildings → building contractor has increased demand for output → hires more staff and increases production. * Taxation – * Income tax cut → consumption increases → AD shifting right * Corporate tax cut → investment increases → AD shifting right * If tax cuts are seen as temp then AD shift may be smaller Multiplier Effect The additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending. * Example continued… * Positive impact - The Gov buys £10 billion of buildings from Bob and Co, → demand from gov raises employment and profits at Bob and Co → as workers see higher earnings and firm owners see higher profits → increase own spending on consumer goods and so on… This is the multiplier effect. * Negative impact could be that spending on foreign goods may increase → neg impact on AD as imports increase. * Size of multiplier depends on marginal propensity to consume and import. * SHOW IMPACT OF MULTIPLIER...
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...When discussing revenue growth since the enactment of the tax cuts, Administration officials typically focus only on revenue growth since 2004. This provides a convenient starting point for their arguments, as it sets a very low bar. In 2001, 2002, and 2003, revenues fell in nominal terms without adjusting for inflation for three straight years, the first time this has occurred since before World War II. Measured as a share of the economy, revenues in 2004 were at their lowest level since 1959. Given this historically low starting point, it is not surprising that revenues have recovered since then. Supporters of the tax cuts selectively cite revenue growth over just the past three years to argue that the tax cuts fueled increases in revenues. The 2001 and 2003 tax cuts were not a good idea because it added about $1.7 trillion to deficits between 2001 and 2008 and because they were financed by borrowing which increases the national debt. In an effort to bolster economic performance, President George W. Bush signed the Economic Stimulus Act of 2008 on February 13, 2008. More than two thirds of the $152 billion bill consisted of economic stimulus payments that were sent beginning in May 2008 to approximately 130 million households. As part of the ten-year tax cut bill passed by Congress in the spring of 2001, the Treasury mailed tax rebate checks of up to $300 for single individuals and up to $600 for households from late July and through late September 2001.Of those households...
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...multiplier is 1/.1 or 10 so, the increase in government spending = $10 billion. For tax cut question, initial spending of $10 billion is still required, but only .9 (= MPC) of a tax cut will be spent. So .9 x tax cut = $10 billion or tax cut = $11.11 billion. Part of the tax reduction ($1.11 billion) is saved, not spent. 2. Options are to reduce government spending, increase taxes, or some combination of both. If the price level is flexible downward, it will fall. In the real world, the goal is to reduce inflation— to keep prices from rising so rapidly—not to reduce the price level. A “conservative” economist might favor cuts in government spending since this would reduce the size of government. A “liberal” economist might favor a tax hike; it would preserve government spending programs. 3. It takes time to ascertain the direction in which the economy is moving (recognition lag), to get a fiscal policy enacted into law (administrative lag); and for the policy to have its full effect on the economy (operational lag). Meanwhile, other factors may change, rendering inappropriate a particular fiscal policy. Nevertheless, discretionary fiscal policy is a valuable tool in preventing severe recession or severe demand‐pull inflation. A political business cycle is the concept that politicians are more interested in reelection than in stabilizing the economy. Before the election, they enact tax cuts and spending increases to please voters even though this may fuel inflation. After...
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...Supplemental Unit 5: Fiscal Policy and Budget Deficits Fiscal and monetary policies are the two major tools available to policy makers to alter total demand, output, and employment. This feature will focus on fiscal policy, what it is and its potential and limitations as a tool with which to promote economic stability and strong growth. What is Fiscal Policy? When the supply of money is economic constant, government expenditures must be financed by either taxes or borrowing. Fiscal policy involves the use of the government’s spending, taxing and borrowing policies. The government’s budget deficit is used to evaluate the direction of fiscal policy. When the government increases its spending and/or reduces taxes, this will shift the government budget toward a deficit. If the government runs a deficit, it will have to borrow funds to cover the excess of its spending relative to revenue. Larger budget deficits and increased borrowing are indicative of expansionary fiscal policy. In contrast, if the government reduces its spending and/or increases taxes, this would shift the budget toward a surplus. The budget surplus would reduce the government’s outstanding debt. Shifts toward budget surpluses and less borrowing are indicative of restrictive fiscal policy. It is important to note that a budget deficit is different from the national debt. A deficit occurs when government spending exceeds revenue over a year, quarter or month. A deficit will increase the size of the national...
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...(P4) Explain how both fiscal and monetary policy decisions have affected a selected business In this part of my assignment I will be explaining the use of fiscal and monetary policy and how these policies affect global/international organisation. The organisation I have chosen to refer to in this part of my assignment is Microsoft. Microsoft is an American multinational software corporation headquartered in, Washington that develops, manufactures, licenses, and supports a wide range of products and services related to computing including Laptops, computers, Xbox 360 and Xbox one. The company was famously founded by Bill Gates in 1975. Microsoft is the world's largest software maker measured by revenues and so far has made $77 billion up to now in 2013 alone. Fiscal policy Fiscal policy is the use of government expenditure and taxation to try to influence the level of economic activity. The varied use of raised and lowered fiscal policies can have a number of effects on customers, public sector organisations such as the NHS and Police and private limited organisations such as Tesco and Microsoft. Below I will describe how different fiscal policies will directly affect Microsoft and its customers. Cuts in income tax If the government fiscal committee decide to cut income tax then this has a direct effect on organisations because it means Microsoft will gain more disposable income and capital spending as some of their revenue income which would go to government is being...
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...is fiscal policy and how can it be used to manage the economy? Briefly describe the current UK fiscal policy, and comment on the effect it may have on the economy. Fiscal policy is the use of government spending, taxation and borrowing to influence the level and growth of aggregate demand, output and employment. Aggregate demand (AD)= Consumption + Investment + Government spending + (Exports – Imports). Changes in fiscal policy affect both aggregate demand and aggregate supply. (Riley 2006) Fiscal policy is used to achieve macroeconomic objectives such as full employment, price level stability and sustained economic growth. Expansionary fiscal policy is an increase in government expenditures or transfer payments, or a decrease in tax revenue. A tax cut will increase AD because it increases households’ disposable income. The greater the disposable income the greater is the quantity of goods and services demanded and therefore the greater is AD. This will stimulate economic growth in a recession, which will shift the AD curve to the right. (Parkin, Powell and Matthews 2008) The magnitude of the shift = expenditure multiplier x the increase in government expenditures. In the short run it will increase both Gross Domestic Product (GDP) and the price level. An increase in the price level will increase the money wage rate, which reduces the SRAS. The SRAS curve shifts left until in the long run real GDP = potential GDP at a higher price level. Contractionary fiscal policy is the...
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...MACROECONOMIC POLICY SIX DEBATES over MACROECONOMIC POLICY ISSUES | YES | NO | 1. Whether or not monetary and fiscal policymakers should try to stabilize the economy | Advocates of active monetary and fiscal policy view the economy as inherently unstable and believe that policy can manage aggregate demand, and thereby, production and employment, to offset the inherent instability. When aggregate demand is inadequate to ensure full employment, policymakers should boost government spending, cut taxes, and expand money supply. However, when aggregate demand is excessive, risking higher inflation, policymakers should cut government spending, raise taxes, and reduce the money supply. Such policy actions put macroeconomic theory to its best use by leading to a more stable economy, which benefits everyone. | Critics of active monetary and fiscal policy emphasize that policy affects the economy with a lag and that our ability to forecast future economic conditions is poor. As a result, attempts to stabilize the economy can end up destabilizing. It might be desirable if policymakers could eliminate all economic fluctuations, but that is not a realistic goal given the limits of macroeconomic knowledge and the inherent unpredictability of world events. Economic policymakers should refrain from intervening often with monetary and fiscal policy and be content if they do no harm. | 2. Whether or not the government should fight recessions with spending hikes rather than tax cuts | Advocates...
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...(P4) Explain how both fiscal and monetary policy decisions have affected a selected business In this part of my assignment I will be explaining the use of fiscal and monetary policy and how these policies affect global/international organisation. The organisation I have chosen to refer to in this part of my assignment is Microsoft. Microsoft is an American multinational software corporation headquartered in, Washington that develops, manufactures, licenses, and supports a wide range of products and services related to computing including Laptops, computers, Xbox 360 and Xbox one. The company was famously founded by Bill Gates in 1975. Microsoft is the world's largest software maker measured by revenues and so far has made $77 billion up to now in 2013 alone. Fiscal policy Fiscal policy is the use of government expenditure and taxation to try to influence the level of economic activity. The varied use of raised and lowered fiscal policies can have a number of effects on customers, public sector organisations such as the NHS and Police and private limited organisations such as Tesco and Microsoft. Below I will describe how different fiscal policies will directly affect Microsoft and its customers. Cuts in income tax If the government fiscal committee decide to cut income tax then this has a direct effect on organisations because it means Microsoft will gain more disposable income and capital spending as some of their revenue income which would go to government is being kept...
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...POLICY AND ANALYSIS Name Course Tutor Date President George W. Bush’s and President Obama’s economic policy The US economy had experienced a series of depression in the past years but it was worst hit by the major terrorist attack of the September 11, 2011 that not only shook the nation but also the world at large. The realities of the recession started hitting the nation officially in December 2007, signaled by the collapse of the housing market and subsequent losses on mortgage related financial assets which in turn resulted to great stress and significant turbulence in the financial markets. All this resulted to an overall fall in the broader economic activity. In an attempt to respond to the worsening economic conditions, the administration lowered the federal funds rate by half the percentage point and as the crisis intensified, Bush’s government instituted the federal tax cuts on all the tax payers (Palley, 2011). The recession came to an end in June 2009 but the resultant economic weakness continued to be experienced in the nation with significant high rates of unemployment levels. There were severe job losses, a fall in family incomes and a rise in poverty levels which impacted negatively on the social life of many Americans. The economic environment also suffered severe losses in terms of drastic fall in investments due to uncertainties in the economy’s future. The adverse effects and subsequent fall in the trading activities led to significant falls in the nation’s...
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...Chapter 5: Government Expenditure and Revenue by Ooi Soon Beng After studying this chapter, you should be able to understand: Public Budget Budget Deficits and Surplus Expansionary and Contractionary Fiscal Policy Discretionary and Automatic Fiscal Policy National Debts and Its Issues and Misconceptions Problems with Fiscal Policy : Macroeconomics According to Keynes, government has to intervene to stabilize the economy. Stabilization can be achieved in part by manipulating the Public Budget to increase output and employment or to reduce inflation. The Budget outlines the government’s taxation and expenditure plans for the coming fiscal year. The Ministry of Finance are responsible for the preparation of the budget. Sources of Revenues: Direct taxes on individuals and companies Indirect taxes on goods and services (gasoline, alcohol, tobacco, etc) Non-tax revenue (stamp duty, licenses, permits, etc) Malaysia: Sources of Revenue (in RM) 1990 2013 2014 Direct Taxes 35.2% 56.5% 59.1% Indirect Taxes 36.7% 16.6% 17.2% Non-Tax Revenue 28.0% 26.9% 23.7% Total Revenue 29,521m 207,913m 224,094m Source: Ministry of Finance Categories of Expenses: Operating Expenditure (emolument, pensions, debt servicing, grant to states, subsidies, supplies, scholarships, etc) Development Expenditure (security, social services, economic services, expenditure ...
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...Fiscal and Monetary Policy The textbook states clearly that the aggregate supply curve (and the economy in general) is heavily influenced by unemployment: “The Keynesian range of the curve is horizontal because neither the price level nor production costs will increase or decrease when there is substantial unemployment in the economy.” (Tucker) This shows that high unemployment should be prevented as much as possible, and quickly alleviated if it begins to rise. “Our Fiscal Policy Paradox”, written by Alan S. Blinder, explores the current fiscal and monetary policy options, and describes which options should be implemented in order to pull the economy out of the recession. The fiscal options that are given are: 1. New jobs tax credit 2. Government hiring 3. Cut sales taxes The tax credit for new jobs would simply be an incentive for employers to hire more people in order to decrease unemployment, which will increase spending in general, a key factor in pulling the nation out of its economic trough. This strategy has been pursued, but not effectively. The author explains: The government could offer tax breaks to firms that increase their employment above some base level. In fact, Congress did just that with the HIRE (Hiring Incentives to Restore Employment) Act in March. But it was legislated on a pitifully small scale and will expire at year's end. We need a larger version that stays around for a while. (WSJ.com) Providing such a credit would theoretically...
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...Fiscal mismanagement caused Argentina’s 2001 crisis Summary: It is believed that the fiscal mismanagement which came from 1) fiscal indiscipline. 2) loose fiscal policy, caused Argentina’s 2001 crisis. Each of these two parts covered the problems of the country’s tax system, fiscal policy, currency policy and government management. The following contents will give more details. Fiscal indiscipline contributed to the crisis Fiscal indiscipline at provincial level lead to a heavier burden on central government In the early 1990s, percentage-based revenue-sharing between the national government and the provinces was replaced with a rigid system of minimum revenue guarantees. But provincial authorities used these guarantees as collateral that enabled them to run up significant private-sector debts for which the central government was ultimately responsible. (case P6) Corruption scandal leaved the government discredited. * A corruption scandal erupted when it was discovered that bribes had been paid to senators in exchange for support of the government’s initiative to bring flexibility to the labor market. (case P3) * In November 2011, Argentina attempted to execute another debt swap, guaranteed by fiscal revenue, but not well received. Instead, capital flight escalated and country risk climbed to 1,700 basis points (Exhibits 8&9 interest rate and bond spread data). Argentina’s loose fiscal...
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...Abstract Fiscal cliff” is the popular shorthand term used to describe the challenge that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect. The deficit which is the difference between what the government takes in and what it spends is expected to be reduced by roughly half beginning in the first days of 2013. This sharp decrease in the deficit in such a short period of time is known as the fiscal cliff. 2012 is the year the world is supposed to end, but it won’t happen on December 21st. For Americans it will be on December 31st. We don’t need a Mayan calendar to tell us that we’re heading towards doom; all we have to do is watch the TV or use the internet and read about the fiscal cliff. Almost all Americans will take a financial blow next year and low income families would be among the hardest hit, if the White House and Congress fail to solve the “fiscal cliff” of big tax increases and spending cuts set to start January 2nd. With the rise in payroll-tax increases, Expiration of the Bush tax cuts decreases in the Child Tax Credit, and the Dividend-Tax Increases, a middle-class family would be hit the hardest. According to Matthews, “For instance, if a couple together makes $82,000 and have four children and pay child care and even though money was tight were able to invest in $10,000 worth of blue-chip, dividend-paying stocks, in addition to socking away money in their 401(k)s; their...
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...will experience a fiscal tightening of unprecedented magnitude at the end of this year. Recently, some respected analysts have pegged the magnitude of the potential fiscal tightening that looms in 2013 at 3.5% of GDP. Our analysis suggests that the potential fiscal tightening in calendar year 2013 under current law is closer to 5% of GDP. Since the CBO figures are based on current law - meaning that they assume expiration of Bush era tax cuts, imposition of the budget sequester, this may be the source for the recent references to a potential fiscal tightening of about 3.5% of GDP in 2013. Adjusting for this legislation which adds $88 billion to the budget deficit in FY2012 and $26 billion in FY2013, the estimated fiscal tightening in FY2013 amounts to 4.0% of potential GDP rather than 3.6%. Second, and most importantly, almost all of the looming fiscal tightening takes effect on January 1, 2013. Thus, an estimate based on a fiscal year comparison will understate the magnitude of the change that the fiscal year runs from October to September. For example, according to the official arbiter on revenue estimating - the Congressional Joint Committee on Taxation (or JCT) - the payroll tax cut is worth $114 billion in CY2012, and this would go to zero in CY2013 if we assume the tax cut expires. The same sort of understatement will be evident for the Bush era tax cuts. Adjusting for this calendar distortion, an estimated fiscal tightening of 4% of GDP on a fiscal year basis is more...
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