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How do governments stabilize the economy?
- 1. How do Governments Stabilize Economies? Fiscal Policy Automatic Stabilizers
- 2. Tools of Fiscal Policy Taxes Taxes Government Spending Goals: Price Stability and Full Employment
- 3. Types of Fiscal Policy (Discretionary Stabilizers) Combats recessions Lowers Taxes Increases Govt. Spending Combats inflation Increases Taxes Decreases Govt. Spending Expansionary Contractionary
- 4. Expansionary Fiscal Policy (LRAS) (LRAS)
- 5. Contractionary Fiscal Policy (LRAS = Potential GDP)
- 6. Problemas Time lags Hard to predict Difficult to implement Political Motivation Favor Tax Cuts Crowding Out Crowding In
- 7. WHAT ARE CONSEQUNECES OF FISCAL POLICY? Govts. borrow money to finance increased spending Interest rates increase Private Investment Decreases Deficits increases Govts. cut spending, so demand for loans falls Interest rates decrease Private Investment Increases EXPANSIONARY: “CROWDING OUT” CONTRACTIONARY: “CROWDING IN”
- 8. MARKET FOR LOANS INVESTMENT DEMAND SLF r% r% r1 r DLF 1 ID DLF Q Q “CROWDING OUT” = Higher r Less I Less AD