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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