ECO 105 Chapter Notes - Chapter 16: Functional Finance, Automatic Stabilizer, Income Tax
5 May 2016
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Document Summary
Crowding out: the offsetting of a change in gov"t expenditures by change in private expenditures in the opposite direction. The gov"t knows the solution: data problems limit fiscal policy for fine tuning. Getting reliable numbers on the economy takes time. We may be in a recession and not know it: the government has large macroeconomic models & leading indicators to predict where the economy will be in the future, but the forecasts are imprecise. The government knows the economy"s potential income. Fiscal policy doesn"t negatively affect other government. Goals: a society has many goals: achieving potential income is only one of those goals, national economic goals may conflict, for example, when the government runs expansionary fiscal policy, the trade deficit increases. When the economy expands, government spending for unemployment insurance decreases and taxes increase. Panel a shows an example of successful stabilization policy. Solid line represents behavior of gdp in the absence of policies.
