The Embedded Tools of Fiscal Policy

AP Macroeconomics

http://www.cartoonstock.com/newscartoons/cartoonists/ksc/lowres/kscn872l.jpg

Where we came from…

In the previous lesson, we learned about the two primary fiscal policy tools of government, and their affect on real GDP.

We practiced manipulating the tools of fiscal policy and analyzing scenarios to determine appropriate fiscal policy.

http://usa.usembassy.de/economy-policy.htm

Where are we going?

In this lesson, you’ll learn about the tools embedded in the economy that respond to different phases of the business cycle.

http://www.languageguide.org/images/im/tools.png

These tools are called “automatic stabilizers”

Why are they automatic stabilizers?

They adjust without action by Congress or the president

They serve as stabilizers because they limit the increase in real GDP during expansions and reduce the decrease in real GDP during a recession.

Do we put the economy on auto-pilot, and leave it to the automatic stabilizers?

http://blog-pfm.imf.org/pfmblog/2009/02/whither-the-automatic-stabilizers.html

Here are some examples of automatic stabilizers:

1) Income tax system

2) Unemployment compensation

3) Stock and bond returns

Income tax system…

As an individual’s nominal income increases, he or she moves into higher tax brackets and pays more taxes, thus limiting the increase in disposable income.

http://www.apfn.org/apfn/tax.htm

Unemployment compensation…

When people are unemployed, their income does not fall to zero – if this were the case, the impact on the economy would be negative. Rather, the negative impact on real GDP is diminished by unemployment compensation, which provides a base level of income.

http://www.tumblr.com/tagged/unemployment-rates

Stock and bond returns… Many corporations establish

the dividends they pay on shares of stock and maintain this payout for several years.

As a result, dividends do not follow the swings of the business cycle.

Bond payments are established at the same time the bond is issued and remain throughout the life of the bond.

http://onceusave.com/stocks-are-a-great-buy/

What is Discretionary Fiscal Policy?

Policy that is the direct result of deliberate actions by policy makers (Krugman, p. 212)

And now…

Some resources:

http://www.reffonomics.com/

Morton workbook Activity 30

Works Cited

Economics of Seinfeld. http://yadayadayadaecon.com/clip/46/

Krugman, Paul, and Robin Wells. Krugman’s Economics for AP. New York: Worth Publishers.

Morton, John S. and Rae Jean B. Goodman. Advanced Placement Economics: Teacher Resource Manual. 3rd ed. New York: National Council on Economic Education, 2003. Print.

Reffonomics. www.reffonomics.com.