Macroeconomics
● DecisionLag: Whenpolicymakersdeducethatactionisneeded,decidingonthemechanismand approachtousetakestime. Forexample,ifthegovernmentdecidestoimplementafscalpolicy,it willneedtodecideonwhethertousetaxes,governmentspending,orbothandgetthenecessary approvals. ● ImplementationLag: Evenafterthedecisionisapproved,ittakestimetointroduceandwitness the impact of a policy tool, such as increasing income tax. This lag can be influenced by the logistical considerations of the tool. Inadditiontotheselags,fscalpolicyishighlyinfluencedbypoliticalinterferencebecauseitstools(e.g., reducing taxes or increasing government spending) might be used to increase some politicians’ popularity. Moreover, individuals may startpredictinghowthegovernmentwillimplementfscalpolicy toolswhichreducestheireffectiveness. Forexample,ifagovernmentincreasestaxesduringaperiodof highinflation,individualswhoknowthatthisisatemporarymeasuremightnotreducetheirconsumption bymuch.Thisslowsdowntheaggregatedemand’sresponseandprohibitsthegovernmentfromreducing inflationary pressures. C. Government Deficits and Debt
Governments record their revenues and expenditures in a government budget . Since fscal policy relies on changing taxes (revenuescollectedbythegovernment)andgovernmentspending (expenditure), the use of these tools affect the government budget.
Government budget = tax revenue − government spending
This equation can indicate one of three scenarios:
1. Budget surplus whereby tax revenue exceeds government spending(T>G). Forinstance,tax revenues are equal to $30 million whereas government spending is equal to $20 million. Therefore, the budget surplus is $10 million. A government runs a budget surplusintimesofinflationaspartofacontractionaryfscal policy because higher taxes(orlowergovernmentspending)reducehouseholds’incomesand purchasing power (or AD) and frms’ investments, and this helps in reducing inflation. 2. Budgetdefcit wherebytaxrevenueislowerthangovernmentspending(T<G). Forinstance,tax revenues are equal to $20 million whereas government spending is equal to $25 million. Therefore, the budget defcit is $5 million. Agovernmentrunsabudgetdefcitintimesofrecessionaspartofanexpansionaryfscalpolicy because lower taxes (or higher government spending) increase households’ incomes and purchasing power (or AD) and frms’ investments, and this helps in increasing employment. However,asgovernmentsreducetaxes,theymightneedtolookforalternativestofnancetheir expenditures. Borrowing is one of these alternatives that cause an increase in national debt .
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