Which of the following fiscal policies would definitely cause a decrease in aggregate expenditures?
A. An increase in transfer payments and an increase in government spending. B. An increase in transfer payments and a decrease in taxes. C. A decrease in taxes and an increase in government spending. D. An increase in taxes and a decrease in government spending.
If expansionary fiscal policy actually causes a recession due to the rise in interest rates (which lowers Ig), why do we still use it?
An interesting question that reflects a very common error in economic thinking reultin from a confusion between the effects of movements in a demand curve and the effects of movements along a demand curve.Expansionary fiscal policy will increase both the real GDP AND the real interest rate, as shown below in the IS-LM graph (which assumes a constant price level): the equilibrium moves from point a to point c. This can be thought of as two steps: from a to b (same interest rate) and from b to c (interest rate rises). The second step offsets part of the first step’s effect on Y, but the rise in r is not sufficient to cause a decline in Y (unless the LM curve is vertical). Thus, the fiscal policy induces both an increase in desired GDP (expansion of output) AND a rise in the real interest rate.If you extend the analysis to allow the price level to change, the result is the Aggregate Demand-Aggregate Supply graph below.The expansionary fiscal policy shown in the IS-LM graph is now seen as a rightward shift in the Aggregate Demand curve from DD to D’D’. The IS-LM view tells us that the expansion of demand will raise the real interest rate and the AD-AS view tells us that the price level will also rise. BOTH factors will induce a backward movement up the new demand curve (D’D’) but not enough to keep the GDP at the initial level (Ya).The effect of the expansionary fiscal policy is, then, to induce an increase in the price level, in the interest rate AND in GDP. The rise in r can’t be seen as just coming out of the blue to depress demand. It is part and parcel of the process of increasing demand and stimulating the economy.Hope this help.
Can anyone explain fiscal deficit? How is it measured and how does it affect a country's economy?
Let us imagine the Government of any country as a person. Let us assume that you are the person, who represents the Government's account.Now you have 1000 units of money with you. You will get another 500 units of money as income and you will have to spend around 900 units on something.This leaves you with 600 units of money. So far, so good!Now, you need to spend 1000 units for some unforeseen expenditure. It is absolutely necessary for you to spend that money. What do you do? You have only 600 units.The Government is a special type of a person. It can spend more than it has, provided it repays it back at some later date.So what the Government does is, it borrows 400 units from a bank and then spends it wherever it wanted to spend it.This borrowing to meet expenditure when the Government does not have enough money, is called Fiscal Deficit.It is usually expressed as a percentage of GDP.Effects on the EconomyIncreased borrowingThe government will increasingly borrow more, asking the federal bank to lend it money. It might even turn to private players for money.Higher debt interest paymentsSelling bonds will increase the national debt, this has a high opportunity cost because it requires future generations to pay higher taxes.Higher Taxes and lower spendingIn the future the govt may have to increase taxes or cut spending in order to reduce the deficit. This may cause reduced incentives to work.Increased Interest ratesIf the govt sells more bonds this is likely to cause interest rates to increase. This is because they will need to increase interest rates in order to attract investors to buy the extra debt. If govt interest rates increase this will push up other interest rates as well.InflationIn extreme circumstances the govt may increase the money supply to pay the debt.
How does inflation not arise when funding goverment expenditure from the treasury or taxes?
Inflation arises whenever there is a disconnect between the offer of money and the goods and services available in an economy. This may arise form a host of factors, like unjustifiably cheap credit, or price-adjustment (read distortion) mechanisms, or out-of-synch wage indexation, and so forth.Whenever an excess of money chases a fixed amount of goods and services available, and so for a sufficiently sustained period, “prices” increase. That is another way of saying that goods and services keep their value but money loses part of its value in proportion to its excess offer.We could say as well that inflation arises when governments try to conjure up value out of thin air: for instance, when they monetise a deficit (i.e. they pay for the difference between what they collect in taxes and their expenditure by “printing money”); this is what happens most glaringly during wars.The examples you have quoted, i.e. paying by tapping the treasury or simply by applying part of the fiscal revenue to a specific expenditure, are by no means inflationary for the simple reason that they do not increase the stock of money because neither is “new money” at all.Treasury is the result of an earlier surplus or the other side of an earlier debt, and tax revenue is simply ordinary revenue that must be applied one way or another by definition.
What is the overall effect of increasing tax and increasing government expenditure by the same proportion?
This has an interesting implication. If an increase in govt. spending is matched by an equal increase in taxes, so that the budget remains balanced, output and national income will rise by the amount of the increase in govt spending. Although it might look impractical for the economy to grow without having deficit budget but it can be proved using simple Keynesian analysis:We all know that people spend a part of their income on consumption, a part is used to pay taxes and save the rest i.e. Total income, Y = C+S+T. Taxes imposed by govt. take a part of the income away from the household and disposable income becomes, Y* = C + S or Y - T.Let us define a variable ‘c’ = marginal propensity to consume, it is the fraction of total additional income that people use for consumption.Now, if total income of economy increases from 0 to Y, total consumption of the economy should be C = C*+ c.Y*, where C*>0 is the minimum consumption level of economy and is a given item, therefore constant.Similarly, suppose planned investment demand of firms = I, also a given item.Planned Govt. expenditure = GTaxes imposed by govt. = TThus aggregate demand for final goods in economy, AD = demand due to planned consumption + planned investment demand + demand on account of govt. expenditure.i.e. AD = C*+ c.Y* + I + G = C*+ I + G + c (Y - T)When the final goods market reaches equilibrium, aggregate demand = output of goods and services in economy = National income/ GDP.i.e. Y = C*+ I + G + c (Y - T)ΔY = ΔG + c ( ΔY - ΔT) since planned investment and minimum consumption level does not change (ΔC* = ΔI = 0)Now coming to your question when ΔG = ΔT, we haveΔY / ΔG = (1-c) / (1-c) = 1This means national income increases by the same amount by which govt. spending increases, and the balanced budget multiplier is unity. For instance if G increases in a fiscal year by 500 the equilibrium income would also increase by 500 in this case.P.S. : It is assumed that the govt. does not impose indirect taxes and subsidies.
Is this a good response to the proposed Copenhagen Protocol?
1. "There exists no subset of man that is smarter ..." An obvious fallacy. A free market functions most efficiently when all players are equally informed, but that never happens in reality. In fact, if you happen to be better informed than others and act on that in a certain way, you can be jailed for the crime of insider trading. In other words, equal information is only an ASSUMPTION of the free market, and if that assumption is not true, then YES, of course there can be a subset of persons who can make better decisions than others. That's the whole IDEA of a market, for god's sake. 2. Another obvious fallacy. If the US were to raise the top marginal tax rate from 39% to, say, 40% for persons making more than $5 million a year, not one poor person would suffer a whit. Reducing incentives to build wealth has no effect on those who live paycheck to paycheck. And it's utterly untrue that government does nothing productive with tax money. In fact, goverment investment is just as effective in job creation as private investment -- and sometimes more so. 3. There are so many fallacies in this one it's hard to count. One wonders where Harrison gets his false information, but it's certainly not from reading scientific journals. Climate models omit precipiation? Lie. Climate models omit cloud albedo? Lie. Climate models omit convection? Lie. Climate models omit solar effects? Lie. Fifty times more water in the air than CO2? Lie -- it's more like 10 times. Beyond that, water and CO2 absorb infrared at different frequencies, so not all of their effects overlap. And beyond that, CO2 is 4 or 5 times more efficient than water at absorbing infrared. And beyond that, water vapor goes in and out of the air too rapidly to forced climate change, while CO2 stays in the air for centuries. 4. This isn't the broken window analogy at all. Nobody is talking about blowing up coal fired power plants. What we're talking about is pricing fossil carbon in a way that recognizes its true cost to society. As far as subsidies go, the current subsidies of oil (to take just one example) massively dwarf those of renewables, or of nuclear. So let's even the playing field.
What causes a shift in the supply curve?
Here are someMovement along Supply Curve – caused by changes in PShifts of the Supply Curve:1. Improvement in technology (productivity of inputs (L-labour & K-capital) is enhanced; thus, the same Q of inputs can produce larger quantity of output)2. A change in Labour cost – ↓ / ↑ in L cost → outward/inward shift of S curve3. A change in construction/capital cost – ↓ / ↑ → outward/inward shift of S curve4. A change in cost of transportation – ↓ / ↑ → outward/inward shift of S curve5. A change in the total N of firms – ↓ / ↑ → inward/outward shift of S curve (for the whole industry/market)6. A change in indirect tax (corporate tax) – ↓ / ↑ → outward/inward shift of S curve7. Government subsidy granted, comes in different forms – cash grants, tax breaks, low interest loans, etc…) Subsidies cause an outward shift of S curveOutward shift – increase of S curveInward shift – decrease of S curveIt also depends on the industry you are analysingA good weather is a crucial determining factor in the agricultural sector, with regards to the size of crops you harvest, but would not do much for the financial sectorThis topic is not that difficult, the internet is full of info, u should do some own research