Discretionary Fiscal Stimulus

• The government expenditure multiplier is the quantitative effect of a change in government expenditure on real GDP. An increase in government expenditure increases aggregate expenditures setting in motion the multiplier process.
• The tax multiplier is the quantitative effect of a change in taxes on real GDP. A decrease in taxes increases disposable income and hence consumption expenditure, setting in motion the multiplier process.

· The effect on aggregate demand from a tax cut is less than that from a similar sized increase in government expenditure. A $1 tax cut generates less than a $1 increase in consumption expenditure since only a fraction (equal to the MPC) of the $1 increase in disposable income is spent on consumption expenditure.

Fiscal Stimulus

• Expansionary fiscal policy (an increase in government expenditure or a decrease in taxes) seeks to eliminate a recessionary gap. If timed correctly and of the correct magnitude, fiscal policy can be used to push the economy to potential GDP.
• The figure shows the effect of expansionary fiscal policy on aggregate demand. At the initial equilibrium, $12 trillion real GDP and price level of 110, there is a recessionary gap. The expansionary policy increases aggregate demand and the multiplied effect shifts the AD curve rightward from AD0 to AD1. The recessionary gap is eliminated and the economy moves to its new equilibrium, $13 trillion real GDP (which equals potential GDP) and price level of 115.

Fiscal Stimulus and Aggregate Supply

The focus so far has been on only aggregate demand. But fiscal policy also impacts aggregate supply.

• Government Expenditure: An increase in government expenditure increases the budget deficit. The demand for loanable funds increases, so the real interest rate rises and investment is crowded out. The decrease in investment offsets the expansionary effect from the increase in government expenditure. The crowding-out effect is strong enough so that the government expenditure is less than 1.
• Tax Cut: A tax cut also has effects on aggregate supply. A tax cut increases the supply of labor and the supply of loanable funds, both of which increase aggregate supply. The supply-side effects make the tax multiplier larger than the government expenditure multiplier.

Дата добавления: 2015-11-04