31. Multiplier effect of Taxation. Multiplier effect of Government Purchases. ?

32. Discretionary Fiscal Policy.

• Means that the changes in taxes and government spending are at the opinion of the Federal government.

33. Cases of discretionary fiscal policy: expansionary and conctractionary policy.

There are 2 cases:

• An expansionary fiscal policy

The economy is experiencing recession and cyclical unemployment: reducing investment spending and AD.

3 main fiscal policy options during recession:

1) increase government spending- Increasing G pushes the economy out of recession. Real GDP rises;

2) Reduce taxes- AE=C+I;

C is determined by Dl.

To increase initial consumption by specific amount, government must reduce taxes by more, than that amount.

Tax reduction :

C1=Co+MPC

C2=Co+MPC

BUT Fiscal policy during recession or depression should create a government budget deficit – government spending in excess of tax revenues.

• A contractionary fiscal policy

Government looks to fiscal policy to control inflation.

3 options:

1. Decrease G;

Demand-pull inflation is experienced as a shifting AE(AD) up. Fiscal policy is desingned to stop such shifts.

2. Raise taxes;

C1=C0+MPC(DI+T)

C2=C0+MPC(DI-T)

3. Use some combination of the two.

BUT!

Contractionary f.p should move toward a government budget surplus- tax revenues in excess of government spending.

Financing of deficit

• Borrowing.

• Money creation.

Disposing of surpluses.

• Debt reduction

Impounding

34. Nondiscretionary Fiscal Policy. Built-in stabilizers.

This is the policy of built-in stabilizers.Government tax revenues change automatically over the course of the business cycle.

"Nondiscretionary"-taxes

Personal income taxes have progressive rates and thus yield more than proportionate increases in tax revenues as GDP expands.

"Nondiscretionary"-transfer payments

Unemployment compensation payments,welfare payments,subsides all decrease during economic expansion and increase during a contraction.

A Built-in stabilizer

Is anything which increases the government budget deficit (or reduces its budget surplus) during a recssion and increases its budget surplus(or reduces its budget deficit) during inflation without requiring explicit action by policfymakers.

Economic importance of Built-in stabilizers

1.Taxes reduce spending and AD

2.It is desirable from the standpoint of stability to reduce spnding when the economy is moving doward inflation

35. Problems and complications of fiscal policy. ?

36. Money: functions and types.

Functions: -to serve as a medium of exchange

- to serve as a measure of value

Types: 1) commodity money (gold coins)

2) fiat money (bills)

3) bank money (book credit)

37. Supply for money.

Money definition(aggregates):

• M0

• M1

• M2

• M3

M0- all currency (notes and coins) in circulation

M1- it includes:

• all currency (notes and coins) in circulation,

• all checkable deposits( bank money)

• all traveler's checks

M2- it includes:

• all of M1

• plus savings and time deposits

M3- it includes:

• all of M2

plus large denomination, long-term time deposits