6355 Lecture Notes - Lecture 12: Deadweight Loss, Opportunity Cost, Economic Surplus

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lilactoad298

5 Jun 2018

School

University of Canberra

Department

University of Canberra

Course

6355

Professor

Tesfaye Gebremedhin

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Policy objects are always for economic growth, full employment and stable price levels.

Fiscal policy: changes in federal taxes and purchases that are intended to achieve macroeconomic

policy objectives, such as high employment, price stability and health rates of economic growth.

Refers to the actions of the federal government, and not state, territory or local governments.

Expansionary fiscal policy: increases in government purchases and/or decreases in taxes in order to

increase aggregate demand.

An increase in government purchases will increase aggregate demand directly.

A reduction in taxes has an indirect effect on aggregate demand through the affect on disposable

income

The goal of expansionary fiscal policy is to increase aggregate demand by more than it would have

increased without policy.

Appropriate when the economy is in equilibrium below full-employment.

Contractionary fiscal policy: decreases in government purchases and/or increases in taxed in order

to reduce aggregate demand.

Appropriate when the economy is above full employment equilibrium and the inflation rate is high.

Automatic fiscal stabilisers work to stabilise the economy without the need to change policy.

E.g. progressive personal income tax rates and transfer payments.

Two main problems with fiscal policy effectiveness:

1. Timing lags

2. Crowding out

Monetary policy: the actions taken by the reserve bank to manage interest rates in the pursuit of

macroeconomic goals.

Inflation targeting: conducting monetary policy so as to commit the central bank to achieving a

publicly announced level of inflation.

Bonds are a legal promise to repay a loan, including the principal amount and regular interest

payments.

Open-market operations are the standard methods central banks use to change the money stock in

modern economies.

Cash rate: the interest rate on loans in the overnight money market. Determined by the interaction

of demand for and supply of funds in the overnight money market.

Expansionary monetary policy: the use of monetary policy by the RBA to decrease interest rates and

increase real GDP

Exchange settlement accounts: accounts held with the RBA by banks and other financial institutions

to enable the overnight transfer of funds between financial institutions.

Contractionary monetary policy: the use of monetary policy by the RBA to increase interest rates

and reduce inflation.

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Document Summary

Policy objects are always for economic growth, full employment and stable price levels. Fiscal policy: changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives, such as high employment, price stability and health rates of economic growth. Refers to the actions of the federal government, and not state, territory or local governments. Expansionary fiscal policy: increases in government purchases and/or decreases in taxes in order to increase aggregate demand. An increase in government purchases will increase aggregate demand directly. A reduction in taxes has an indirect effect on aggregate demand through the affect on disposable income. The goal of expansionary fiscal policy is to increase aggregate demand by more than it would have increased without policy. Appropriate when the economy is in equilibrium below full-employment. Contractionary fiscal policy: decreases in government purchases and/or increases in taxed in order to reduce aggregate demand.

Related Questions

In an effort to move the economy out of a recession, the federal government would engage in expansionary economic policies. Respond to the following points in your paper on the actions the government would take to address expansionary fiscal and monetary policies:

Expansionary Fiscal Policy:

Explain the actions the federal government would take while engaging in expansionary fiscal policy in terms of the following:

The necessary change in taxes and government spending,

The effect on aggregate demand, GDP, and employment.

Expansionary Monetary Policy:

The three tools the Federal Reserve Bank (The Fed) uses when conducting monetary policy are the required reserve ratio, the discount rate, and open market operations.

Explain the actions of the Fed in regard to the three tools.

When the required reserve ratio is increased or decreased

When the discount rate is increased or decreased

Buying or selling government securities when conducting expansionary monetary policy

Explain how these actions would affect the money supply, interest rates, spending, aggregate demand, GDP, and employment.

raspberrygoose799

1. If government tax policy requires Jane to pay $28,000 in taxes on an annual income of $200,000 and Mary to pay $10,000 in tax on the annual income of $100,000, then the tax policy is:

		regressive.
		progressive.
		proportional.
		optional.

2. When increasing oil prices cause aggregate supply to shift to the left, then:

		unemployment and inflation decrease.
		unemployment decreases and inflation increases.
		unemployment and inflation increase.
		unemployment increases and inflation decreases.

3. What do goods like gasoline, tobacco, and alcohol typically share in common?

		A progressive tax is imposed on each of them.
		A regressive tax is imposed on each of them.
		They are all subject to government excise taxes.
		They are all subject to government fiscal taxes.

4. When inflation begins to climb to unacceptable levels in the economy, the government should:

		use contractionary fiscal policy to shift aggregate demand to the right.
		use contractionary fiscal policy to shift aggregate demand to the left.
		use expansionary fiscal policy to shift aggregate demand to the right.
		use expansionary fiscal policy to shift aggregate demand to the left.

rubykangaroo105

Fiscal policy is carried out primarily by

A) the Federal government.

B) state and local governments working together.

C) state governments alone.

D) local governments alone.

Fiscal policy refers to the:

A) manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.

B) manipulation of government spending and taxes to achieve greater equality in the distribution of income.

C) altering the interest rate to change aggregate demand.

D) fact that equal increases in government spending and taxation will be contractionary.

Expansionary fiscal policy is so named because it:

A) involves an expansion of the nation's money supply.

B) necessarily expands the size of government.

C) is aimed at achieving greater price stability.

D) is designed to expand real GDP.

An appropriate fiscal policy for severe demand-pull inflation is:

A) an increase in government spending.

B) depreciation of the dollar.

C) a reduction in interest rates.

D) a tax rate increase.

29. The amount by which government expenditures exceed revenues during a particular year is the:

A) public debt.

B) budget deficit.

C) full-employment.

D) GDP gap.

30. If actual GDP is greater than potential GDP, we have

A) a negative GDP gap

B) a positive GDP gap

C) minimum GDP gap

D) maximum GDP gap

31. Money functions as:

A) a store of value.

B) a unit of account.

C) a medium of exchange

D) all of the choices

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6355 Lecture Notes - Lecture 12: Deadweight Loss, Opportunity Cost, Economic Surplus

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