Description
This is a presentation describes detail how national income is determined.
Determination of National Income and the role of Fiscal Policy
• Aggregate demand is the total amount of goods demanded in an economy. • AD = C + I + G + NX ( C= consumption,I = investment, g=govt expenditure,NX=exports) • Output is at the equilibrium level when the quantity of output produced is equal to the quantity demanded. • Y = AD = C + I + G + NX • When aggregate demand ie the amount people want to buy- is not equal to output, there is unplanned inventory investment or disinvestment. • IU = Y – AD=Improper Inventory.(If IU +ve, accumu. Of inventory, if –ve shortage so prices will rise.
Aggregate Demand and Equilibrium Output
The Equilibrium Level of National Income
• The Keynesian diagram: the income and expenditure approach
– the 45° line
AD or Expenditure
Deriving equilibrium national income
Y = AD
450
O
Y
The Equilibrium Level of National Income
• The Keynesian diagram: the income and expenditure approach
– the 45° line – the expenditure curve
Consumption Function
• Assuming that consumption demand increases with the level of income, the consumption function is expressed as • C = ? + cY ( C=Consumption or Expenditure ,Y=Income, C dot=Autonomous Part of the expenditure not dependent on income.) • ? > 0; 0 < c < 1 • The coefficient ‘c’ is known as the marginal propensity to consume. • Marginal propensity to consume or MPC is defined as the amount of increase in consumption for a unit increase in income.
AD
Deriving equilibrium national income
AD = Y
C = ? + cY
?
O
Y
Consumption and Saving
• Income that is not spent on consumption is saved. • Formally, Saving S ? Y – C • Or, S ? Y - ? – cY = - ? + (1 – c)Y • We see that saving is an increasing function of the level of income because the marginal propensity to save, s = 1-c is positive.
Consumption, Aggregate Demand and Autonomous spending
• Now, we add investment, government spending and taxes, and foreign trade to our simple model. • For the moment we assume that each of the above is autonomous i.e. independent of income. • Here, I = Investment; G = Govt. spending
TA NX = Taxes
= net exports
Consumption, Aggregate Demand and Autonomous spending
• Consumption now depends on disposable income. • YD = Y – T? • Aggregate demand is the sum of the consumption function, investment, government spending, and net exports.
Consumption, Aggregate Demand and Autonomous spending
• To be at equilibrium, AD=Y, so Y=A+cY
AD
Deriving equilibrium national income
AD = Y AD = ? + cY
AD0 C = ? + cY
? ?
O
Y0
Y
The Equilibrium Level of National Income
• The circular flow of income
The circular flow of income
The circular flow of income
Cd
The circular flow of income
Incomes
Cd
The circular flow of income
Incomes
Cd
W=S+T+M
The circular flow of income
J = I + G + X ( J= Injections)
Incomes
Cd
W = S + T + M ( W=Withdrawals)
The Equilibrium Level of National Income
• Effect on national income of a change in injections and/or withdrawals
– J>W : national income rises
– W>J : national income falls
• The Keynesian diagram: the withdrawals and injections approach
– the withdrawals curve
Cd, W, J
Deriving equilibrium national income
W
O
Y
The Equilibrium Level of National Income
• Effect on national income of a change in injections and/or withdrawals
– J>W : national income rises(moves towards right) – W>J : national income falls
• The Keynesian diagram: the withdrawals and injections approach
– the withdrawals curve
– the injections curve
Cd, W, J
Deriving equilibrium national income
W
J
O
Y
The Equilibrium Level of National Income
• Effect on national income of a change in injections and/or withdrawals
– J>W : national income rises
– W>J : national income falls
• The Keynesian diagram: the withdrawals and injections approach
– the withdrawals curve – the injections curve – equilibrium
Cd, W, J
Deriving equilibrium national income
W
a
J b
O Y1
Y
Cd, W, J
Deriving equilibrium national income
W c d
O Y2
J
Y
Cd, W, J
Deriving equilibrium national income
W
x
J
O Ye
Y
Formula for Equilibrium Output/Income
• The equilibrium condition in the goods market happen when output is equal to aggregate demand. {i.e. whatever we take out from the system (W), is equal to whatever we put in (j) } • Y = AD • Or, Y = ? + cY • Or, Y – cY = ? • Or, Y (1 – c) = ? • Or, Y = ?/(1 – c) • Hence, ?Y = ? ?/(1 – c)
The Multiplier
• By how much does a Re 1 increase in autonomous spending raises the level of income? • By Re 1!? • In the first instance, output increases by Re 1 to match Re 1 increase in autonomous spending. • This increase in output or income would give rise to further increase in induced spending. • This induced spending happens because of a rise in consumption brought about by a rise in income by Re 1.
• If Y1=1000, Y2=2000, mpc=0.8 how much should the govt spend increase the NI from 1000 to 2000? Ans. (Delta)Y = (Delta) A/(1-c) 2000-1000=(Delta)A/1-0.2 . (Delta A) = 200.
1/1-c is the multiplier.
• Suppose govt buys Rs 100 cement froma cement manufacturer.Hence govt has managed to increase the income of atleast one sector of the economy by Rs 100.Now say the MPC of cement producers is 0.9, ie they consume or their expenditure is Rs. 90. Say this is for buying electricity. Hence another sector’s income increases by Rs 90. hence increase in overall income of the economy is 190 from Rs 100. If elec dept.’s MPC is also 0.9 , then the income of another sector is increased by Rs 81. This process goes on infinite times. As illustrated in the following slide.
The Multiplier
( 1 + c + c 2) ? ? • Multiplier 1/1-c helps the govt 1 know how much it has to ?? spend in order to increase the 1-c
c2 ? ?
c2 ? ?
The Government Sector
• G – Government purchases of goods and services • TA – Taxes • TR – Transfers • Disposable Income (YD) is the net income available for spending by households after they receive transfers from and pay taxes to the government. • The consumption fn becomes • C = ? + cYD = ? + c (Y + TR – TA)
Specification of the fiscal policy
• Suppose the government purchases a constant amount G; • A proportional income tax ‘t’ – tY ( ie Income increases the Tax to be paid increases) • TR – Transfers • Disposable Income (YD) is the net income available for spending by households after they receive transfers( ie subsidies, unemployment benefits) from and pay taxes to the government. • The consumption fn becomes • C = ? + cYD = ? + c(Y + TR – TA)
Specification of Fiscal Policy
• C = ? + cYD = ? + c(Y + TR – tY) • C = ? + cYD = ? + cTR + c(1– t)Y • The presence of transfers raises autonomous consumption spending.( ie u receive money so can spend it.) • Income taxes, by contrast lower consumption spending at each level of income.( here u give money to the govt so cant spend it.)
EQUILIBRIUM INCOME
• • • • • Y = AD Y = ? + c( 1-t )Y For Y0 = equilibrium level of income Y0 = (?)/1-c(1-t) (Imp.) We see that the effect of govt. sector is two fold • Raises autonomous spending by G and induced spending by cTR • Income tax lowers the multiplier.
AUTOMATIC STABILIZERS
• An automatic stabilizer is any mechanism in the economy that automatically reduces the amount by which output changes in response to change in autonomous demand. • Proportional income tax is one. • Unemployment benefits is the other. TR should therefore rise when Y falls.
Budget
• The annual financial statement of the government will have sources of funds on one side and uses of funds on the other. • Budget surplus is the excess of sources of funds over its uses. • A negative Budget surplus implies a budget deficit. • Budget surplus is denoted as • BS = TA – G - TR
Sources of Funds
• • • • • • • • • • • A. Tax Revenue 1. Direct Tax Income Tax Corporation Tax 2. Indirect Taxes Excise duties Customs duties Service Tax B. Non Tax Revenue Dividends and Profits Investment in PSUs, predominantly RBI, Oil companies, FIs, PSU Banks, etc. • C. Capital Receipts • Total Public Debt • Other capital receipts like recovery of old loans, telecom license fees etc.
Uses of Funds
• A. Non Planned Expenditure • Revenue in nature like salaries, interest payments, pensions, subsidies, defense spending which is regular in nature etc. • Capital in nature like non planned defense outlays, loans etc. • B. Planned Expenditure • Revenue in nature, as per the planned outlays. • Capital in nature as per the planned outlays.
Types of Budget deficits
• Budgetary Deficit = Total Expenditure – Total Receipts • Fiscal Deficit = Total Expenditure – (Revenue Receipts + Other capital Receipts) • Primary Deficit = Fiscal Deficit – Interest Payments
The Keynesian Analysis of Unemployment and Inflation
• Inflation and unemployment together
The Keynesian Analysis of Unemployment and Inflation
• Inflation and unemployment together
– inflationary pressures before the fullemployment level of income
The Keynesian Analysis of Unemployment and Inflation
Inflation and unemployment together
– inflationary pressures before the fullemployment level of income – implications for shape of AS curve
Unemployment and inflation
AS1
Price level O
YF
Y
Unemployment and inflation
AS2 AS1
Price level O
YF
Y
The Keynesian Analysis of Unemployment and Inflation
• Inflation and unemployment together
– inflationary pressures before the fullemployment level of income – implications for shape of AS curve – effect of an increase in aggregate demand
The effects of increases in aggregate demand on national output
AS
Price level
O
YP
National output
The effects of increases in aggregate demand on national output
AS
Price level
AD4
AD1
O
AD2
Y3
AD3
Y4
YP
Y1
Y2
National output
The Keynesian Analysis of Unemployment and Inflation
• The Phillips curve
– the shape of the curve
The original Phillips curve
9 8 7
Wage inflation (%)
6 5 4 3 2 1 0 0 1 2 3 4 5 6
Unemployment (%)
The Keynesian Analysis of Unemployment and Inflation
• The Phillips curve
– the shape of the curve – the position of the curve
The original Phillips curve
9 8 7
Wage inflation (%)
6 5 4 3 2 1 0 0 1 2 3 4 5 6
Unemployment (%)
The Keynesian Analysis of Unemployment and Inflation
• The Phillips curve
– the shape of the curve – the position of the curve – policy implications of the curve
The Keynesian Analysis of Unemployment and Inflation
• The Phillips curve
– the shape of the curve – the position of the curve – policy implications of the curve – the breakdown of the curve
The Keynesian Analysis of Unemployment and Inflation
• The Phillips curve
– the shape of the curve – the position of the curve – policy implications of the curve – the breakdown of the curve – recent relationship between inflation and unemployment
Inflation (%)
26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 1 2 3 4
The breakdown of the Phillips curve?
65 66 62 61 64 67 63 60
5 6 7 8 9 10 11 12 13
Unemployment (%)
Inflation (%)
26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 1 2 3 4
The breakdown of the Phillips curve?
65 66 62 61 64 67 63 60
Original Phillips curve
5
6
7
8
9
10
11
12
13
Unemployment (%)
Inflation (%)
26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 1 2 3 4
The breakdown of the Phillips curve?
74
73 70 69 65 68 66 62 61 64 67 63 60
71 72
5
6
7
8
9
10
11
12
13
Unemployment (%)
Inflation (%)
26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 1 2 3 4
The breakdown of the Phillips curve?
75
76 74 79 77
73 70 69 65 68 66 62 61 64 67 63 60
71 72 78
5
6
7
8
9
10
11
12
13
Unemployment (%)
Inflation (%)
26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 1 2 3 4
The breakdown of the Phillips curve?
75
76 74 79 77
80
81 73 70 69 65 68 66 62 61 64 67 63 60
5 6 7 8 9 10 11
71 72 78 82 85
84
83
12
13
Unemployment (%)
Inflation (%)
26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 1 2 3 4
The breakdown of the Phillips curve?
75
76 74 79 77
80
81 73 70 69 65 68 66 62 61 64 67 63 60
5 6 7 8
71 72 78
90 89 91 88 95 94 92 82 85
84
87
93
83
86
9
10
11
12
13
Unemployment (%)
Inflation (%)
26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 1 2 3 4
The breakdown of the Phillips curve?
75
76 74 79 77
80
81 73 70 69 65 68 66 62 61 64 67 63 60
5
71 72 78
90 89 91 88 97 96 95 94 92 82 85
84
98 01 00 99
87
93
83
86
6
7
8
9
10
11
12
13
Unemployment (%)
The Role of Fiscal Policy
• The purpose of fiscal policy
– correcting a fundamental disequilibrium – fine tuning
• Deficits and surpluses
– central government deficits and surpluses – public-sector deficits and surpluses – the national debt
The Role of Fiscal Policy
• The use of fiscal policy
– automatic fiscal stabilisers – discretionary fiscal policy
Effectiveness of Fiscal Policy
• Factors determining the effectiveness of fiscal policy
– accuracy of forecasting
– effect on J and W
– effect of changes in J and W on national income – timing of the effects – effects on the various macro objectives
Effectiveness of Fiscal Policy
• Discretionary policy
– problems of forecasting the magnitude of the effects
• • • • • effects of changes in government expenditure crowding out effects of changes in taxes size of the multiplier random shocks
– problems of timing and time lags
• various time lags • policy may be destabilising
Fiscal policy: stabilising or destabilising?
Path (a): no intervention
Real national income
3 4 3 4 2 1 2
1 O
Time
Fiscal policy: stabilising or destabilising?
Path (a): no intervention Path (b): policy stabilises 3 4 3 4 2 1 2
Real national income
1 O
Time
Fiscal policy: stabilising or destabilising?
Path (a): no intervention Path (b): policy stabilises Path (c): policy destabilises 3 4 3 4 2 1 2
Real national income
1 O
Time
Effectiveness of Fiscal Policy
• Side-effects of discretionary policy
– cost inflation – welfare and distributive justice – incentives
• A rules-based approach to fiscal policy
doc_462017854.ppt
This is a presentation describes detail how national income is determined.
Determination of National Income and the role of Fiscal Policy
• Aggregate demand is the total amount of goods demanded in an economy. • AD = C + I + G + NX ( C= consumption,I = investment, g=govt expenditure,NX=exports) • Output is at the equilibrium level when the quantity of output produced is equal to the quantity demanded. • Y = AD = C + I + G + NX • When aggregate demand ie the amount people want to buy- is not equal to output, there is unplanned inventory investment or disinvestment. • IU = Y – AD=Improper Inventory.(If IU +ve, accumu. Of inventory, if –ve shortage so prices will rise.
Aggregate Demand and Equilibrium Output
The Equilibrium Level of National Income
• The Keynesian diagram: the income and expenditure approach
– the 45° line
AD or Expenditure
Deriving equilibrium national income
Y = AD
450
O
Y
The Equilibrium Level of National Income
• The Keynesian diagram: the income and expenditure approach
– the 45° line – the expenditure curve
Consumption Function
• Assuming that consumption demand increases with the level of income, the consumption function is expressed as • C = ? + cY ( C=Consumption or Expenditure ,Y=Income, C dot=Autonomous Part of the expenditure not dependent on income.) • ? > 0; 0 < c < 1 • The coefficient ‘c’ is known as the marginal propensity to consume. • Marginal propensity to consume or MPC is defined as the amount of increase in consumption for a unit increase in income.
AD
Deriving equilibrium national income
AD = Y
C = ? + cY
?
O
Y
Consumption and Saving
• Income that is not spent on consumption is saved. • Formally, Saving S ? Y – C • Or, S ? Y - ? – cY = - ? + (1 – c)Y • We see that saving is an increasing function of the level of income because the marginal propensity to save, s = 1-c is positive.
Consumption, Aggregate Demand and Autonomous spending
• Now, we add investment, government spending and taxes, and foreign trade to our simple model. • For the moment we assume that each of the above is autonomous i.e. independent of income. • Here, I = Investment; G = Govt. spending
TA NX = Taxes
= net exports
Consumption, Aggregate Demand and Autonomous spending
• Consumption now depends on disposable income. • YD = Y – T? • Aggregate demand is the sum of the consumption function, investment, government spending, and net exports.
Consumption, Aggregate Demand and Autonomous spending
• To be at equilibrium, AD=Y, so Y=A+cY
AD
Deriving equilibrium national income
AD = Y AD = ? + cY
AD0 C = ? + cY
? ?
O
Y0
Y
The Equilibrium Level of National Income
• The circular flow of income
The circular flow of income
The circular flow of income
Cd
The circular flow of income
Incomes
Cd
The circular flow of income
Incomes
Cd
W=S+T+M
The circular flow of income
J = I + G + X ( J= Injections)
Incomes
Cd
W = S + T + M ( W=Withdrawals)
The Equilibrium Level of National Income
• Effect on national income of a change in injections and/or withdrawals
– J>W : national income rises
– W>J : national income falls
• The Keynesian diagram: the withdrawals and injections approach
– the withdrawals curve
Cd, W, J
Deriving equilibrium national income
W
O
Y
The Equilibrium Level of National Income
• Effect on national income of a change in injections and/or withdrawals
– J>W : national income rises(moves towards right) – W>J : national income falls
• The Keynesian diagram: the withdrawals and injections approach
– the withdrawals curve
– the injections curve
Cd, W, J
Deriving equilibrium national income
W
J
O
Y
The Equilibrium Level of National Income
• Effect on national income of a change in injections and/or withdrawals
– J>W : national income rises
– W>J : national income falls
• The Keynesian diagram: the withdrawals and injections approach
– the withdrawals curve – the injections curve – equilibrium
Cd, W, J
Deriving equilibrium national income
W
a
J b
O Y1
Y
Cd, W, J
Deriving equilibrium national income
W c d
O Y2
J
Y
Cd, W, J
Deriving equilibrium national income
W
x
J
O Ye
Y
Formula for Equilibrium Output/Income
• The equilibrium condition in the goods market happen when output is equal to aggregate demand. {i.e. whatever we take out from the system (W), is equal to whatever we put in (j) } • Y = AD • Or, Y = ? + cY • Or, Y – cY = ? • Or, Y (1 – c) = ? • Or, Y = ?/(1 – c) • Hence, ?Y = ? ?/(1 – c)
The Multiplier
• By how much does a Re 1 increase in autonomous spending raises the level of income? • By Re 1!? • In the first instance, output increases by Re 1 to match Re 1 increase in autonomous spending. • This increase in output or income would give rise to further increase in induced spending. • This induced spending happens because of a rise in consumption brought about by a rise in income by Re 1.
• If Y1=1000, Y2=2000, mpc=0.8 how much should the govt spend increase the NI from 1000 to 2000? Ans. (Delta)Y = (Delta) A/(1-c) 2000-1000=(Delta)A/1-0.2 . (Delta A) = 200.
1/1-c is the multiplier.
• Suppose govt buys Rs 100 cement froma cement manufacturer.Hence govt has managed to increase the income of atleast one sector of the economy by Rs 100.Now say the MPC of cement producers is 0.9, ie they consume or their expenditure is Rs. 90. Say this is for buying electricity. Hence another sector’s income increases by Rs 90. hence increase in overall income of the economy is 190 from Rs 100. If elec dept.’s MPC is also 0.9 , then the income of another sector is increased by Rs 81. This process goes on infinite times. As illustrated in the following slide.
The Multiplier
( 1 + c + c 2) ? ? • Multiplier 1/1-c helps the govt 1 know how much it has to ?? spend in order to increase the 1-c
c2 ? ?
c2 ? ?
The Government Sector
• G – Government purchases of goods and services • TA – Taxes • TR – Transfers • Disposable Income (YD) is the net income available for spending by households after they receive transfers from and pay taxes to the government. • The consumption fn becomes • C = ? + cYD = ? + c (Y + TR – TA)
Specification of the fiscal policy
• Suppose the government purchases a constant amount G; • A proportional income tax ‘t’ – tY ( ie Income increases the Tax to be paid increases) • TR – Transfers • Disposable Income (YD) is the net income available for spending by households after they receive transfers( ie subsidies, unemployment benefits) from and pay taxes to the government. • The consumption fn becomes • C = ? + cYD = ? + c(Y + TR – TA)
Specification of Fiscal Policy
• C = ? + cYD = ? + c(Y + TR – tY) • C = ? + cYD = ? + cTR + c(1– t)Y • The presence of transfers raises autonomous consumption spending.( ie u receive money so can spend it.) • Income taxes, by contrast lower consumption spending at each level of income.( here u give money to the govt so cant spend it.)
EQUILIBRIUM INCOME
• • • • • Y = AD Y = ? + c( 1-t )Y For Y0 = equilibrium level of income Y0 = (?)/1-c(1-t) (Imp.) We see that the effect of govt. sector is two fold • Raises autonomous spending by G and induced spending by cTR • Income tax lowers the multiplier.
AUTOMATIC STABILIZERS
• An automatic stabilizer is any mechanism in the economy that automatically reduces the amount by which output changes in response to change in autonomous demand. • Proportional income tax is one. • Unemployment benefits is the other. TR should therefore rise when Y falls.
Budget
• The annual financial statement of the government will have sources of funds on one side and uses of funds on the other. • Budget surplus is the excess of sources of funds over its uses. • A negative Budget surplus implies a budget deficit. • Budget surplus is denoted as • BS = TA – G - TR
Sources of Funds
• • • • • • • • • • • A. Tax Revenue 1. Direct Tax Income Tax Corporation Tax 2. Indirect Taxes Excise duties Customs duties Service Tax B. Non Tax Revenue Dividends and Profits Investment in PSUs, predominantly RBI, Oil companies, FIs, PSU Banks, etc. • C. Capital Receipts • Total Public Debt • Other capital receipts like recovery of old loans, telecom license fees etc.
Uses of Funds
• A. Non Planned Expenditure • Revenue in nature like salaries, interest payments, pensions, subsidies, defense spending which is regular in nature etc. • Capital in nature like non planned defense outlays, loans etc. • B. Planned Expenditure • Revenue in nature, as per the planned outlays. • Capital in nature as per the planned outlays.
Types of Budget deficits
• Budgetary Deficit = Total Expenditure – Total Receipts • Fiscal Deficit = Total Expenditure – (Revenue Receipts + Other capital Receipts) • Primary Deficit = Fiscal Deficit – Interest Payments
The Keynesian Analysis of Unemployment and Inflation
• Inflation and unemployment together
The Keynesian Analysis of Unemployment and Inflation
• Inflation and unemployment together
– inflationary pressures before the fullemployment level of income
The Keynesian Analysis of Unemployment and Inflation
Inflation and unemployment together
– inflationary pressures before the fullemployment level of income – implications for shape of AS curve
Unemployment and inflation
AS1
Price level O
YF
Y
Unemployment and inflation
AS2 AS1
Price level O
YF
Y
The Keynesian Analysis of Unemployment and Inflation
• Inflation and unemployment together
– inflationary pressures before the fullemployment level of income – implications for shape of AS curve – effect of an increase in aggregate demand
The effects of increases in aggregate demand on national output
AS
Price level
O
YP
National output
The effects of increases in aggregate demand on national output
AS
Price level
AD4
AD1
O
AD2
Y3
AD3
Y4
YP
Y1
Y2
National output
The Keynesian Analysis of Unemployment and Inflation
• The Phillips curve
– the shape of the curve
The original Phillips curve
9 8 7
Wage inflation (%)
6 5 4 3 2 1 0 0 1 2 3 4 5 6
Unemployment (%)
The Keynesian Analysis of Unemployment and Inflation
• The Phillips curve
– the shape of the curve – the position of the curve
The original Phillips curve
9 8 7
Wage inflation (%)
6 5 4 3 2 1 0 0 1 2 3 4 5 6
Unemployment (%)
The Keynesian Analysis of Unemployment and Inflation
• The Phillips curve
– the shape of the curve – the position of the curve – policy implications of the curve
The Keynesian Analysis of Unemployment and Inflation
• The Phillips curve
– the shape of the curve – the position of the curve – policy implications of the curve – the breakdown of the curve
The Keynesian Analysis of Unemployment and Inflation
• The Phillips curve
– the shape of the curve – the position of the curve – policy implications of the curve – the breakdown of the curve – recent relationship between inflation and unemployment
Inflation (%)
26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 1 2 3 4
The breakdown of the Phillips curve?
65 66 62 61 64 67 63 60
5 6 7 8 9 10 11 12 13
Unemployment (%)
Inflation (%)
26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 1 2 3 4
The breakdown of the Phillips curve?
65 66 62 61 64 67 63 60
Original Phillips curve
5
6
7
8
9
10
11
12
13
Unemployment (%)
Inflation (%)
26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 1 2 3 4
The breakdown of the Phillips curve?
74
73 70 69 65 68 66 62 61 64 67 63 60
71 72
5
6
7
8
9
10
11
12
13
Unemployment (%)
Inflation (%)
26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 1 2 3 4
The breakdown of the Phillips curve?
75
76 74 79 77
73 70 69 65 68 66 62 61 64 67 63 60
71 72 78
5
6
7
8
9
10
11
12
13
Unemployment (%)
Inflation (%)
26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 1 2 3 4
The breakdown of the Phillips curve?
75
76 74 79 77
80
81 73 70 69 65 68 66 62 61 64 67 63 60
5 6 7 8 9 10 11
71 72 78 82 85
84
83
12
13
Unemployment (%)
Inflation (%)
26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 1 2 3 4
The breakdown of the Phillips curve?
75
76 74 79 77
80
81 73 70 69 65 68 66 62 61 64 67 63 60
5 6 7 8
71 72 78
90 89 91 88 95 94 92 82 85
84
87
93
83
86
9
10
11
12
13
Unemployment (%)
Inflation (%)
26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 1 2 3 4
The breakdown of the Phillips curve?
75
76 74 79 77
80
81 73 70 69 65 68 66 62 61 64 67 63 60
5
71 72 78
90 89 91 88 97 96 95 94 92 82 85
84
98 01 00 99
87
93
83
86
6
7
8
9
10
11
12
13
Unemployment (%)
The Role of Fiscal Policy
• The purpose of fiscal policy
– correcting a fundamental disequilibrium – fine tuning
• Deficits and surpluses
– central government deficits and surpluses – public-sector deficits and surpluses – the national debt
The Role of Fiscal Policy
• The use of fiscal policy
– automatic fiscal stabilisers – discretionary fiscal policy
Effectiveness of Fiscal Policy
• Factors determining the effectiveness of fiscal policy
– accuracy of forecasting
– effect on J and W
– effect of changes in J and W on national income – timing of the effects – effects on the various macro objectives
Effectiveness of Fiscal Policy
• Discretionary policy
– problems of forecasting the magnitude of the effects
• • • • • effects of changes in government expenditure crowding out effects of changes in taxes size of the multiplier random shocks
– problems of timing and time lags
• various time lags • policy may be destabilising
Fiscal policy: stabilising or destabilising?
Path (a): no intervention
Real national income
3 4 3 4 2 1 2
1 O
Time
Fiscal policy: stabilising or destabilising?
Path (a): no intervention Path (b): policy stabilises 3 4 3 4 2 1 2
Real national income
1 O
Time
Fiscal policy: stabilising or destabilising?
Path (a): no intervention Path (b): policy stabilises Path (c): policy destabilises 3 4 3 4 2 1 2
Real national income
1 O
Time
Effectiveness of Fiscal Policy
• Side-effects of discretionary policy
– cost inflation – welfare and distributive justice – incentives
• A rules-based approach to fiscal policy
doc_462017854.ppt