Fiscal Policy

A few things that one probably should know/be able to do relative to fiscal policy and economic stabilization

Aggregate demand – aggregate supply model

Using the aggregate demand – aggregate supply model, illustrate graphically the effects (on both output/income and price level) of an expansionary fiscal measure. Be able to illustrate the differing impact of an expansionary fiscal measure depending on whether the economy has (a) a great deal of “slack” in terms of idle resources, (b) virtually no excess capacity, that is, that the economy is operation at or near full employment/full production, (c) the economy is operating at a level between the two extremes indicated in (a) and (b) above.

If, instead of a tax cut that is geared primarily toward consumers and low-income households, or a general, broad based increase in government spending (outlays), the expansionary fiscal policy is targeted in such a way as to increase business investment spending, capital accumulation, and production incentives—how would this be illustrated using the aggregate demand – aggregate supply model?

Financing Government Spending

What are the alternative methods available to government for financing increased spending? Which method tends to be more/less expansionary in terms of stimulative impact? The term or concept “crowding out” is attached to which? Explain!

Discretionary stabilization policy v automatic stabilizers

Distinguish between “automatic stabilizers” and discretionary stabilization policy. How do automatic stabilizers affect the balance (surplus/deficit status) of the federal budget over the cycle? Give specific examples of automatic stabilizers in the U.S. economy.

Tax structure

How does a progressive tax structure differ from a proportional (sometimes referred to as a “flat tax” or a “flat rate tax”) tax structure? How do these differ from a regressive tax structure? Which tax structure would tend to act more strongly as an automatic stabilizer?

The problem of timing

What are the three time lag components associated with the use of discretionary fiscal (also monetary) policy? Which, if any, of these lag components would be shortened, or eliminated, with automatic stabilizers?