Core-022 Government and Fiscal Policy
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About Core-022 Government and Fiscal Policy
About the Teacher
Jay Moulton
Jay Moulton is a business veteran. In short:
- Corporate finance and turnaround expert in U.S. and Canada
- CEO or operator of numerous companies in many industries
- 30 years of actually applying business economics principles
- Successfully led and invested in several leveraged buyouts
- Director or advisor to 30+ different companies
- Experience in both for-profit and not-for-profit sectors
- Producer of 700 professional videos and several TV shows
- Author of six economics and business strategy books
- Graduate of Harvard Business School MBA program
- Graduate of The Royal Military College of Canada
- Professional electrical engineer
- Governor of the Harvard Club of British Columbia
Government and Fiscal Policy
MODULE 1
The use of government spending and taxation to influence the economy is called "fiscal policy." Fiscal policy can favorably influence aggregate demand and economic activity thereby advancing governments' economic objectives. Too much government spending and intervention causes problems.
Fiscal Deficit vs Debt
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This video examines the difference between a country's fiscal deficit and its debt, and the interaction of the two. Fiscal deficits contribute to a country's accumulated debt. How much debt is too much?
Most governments' annual budgets feature fiscal deficits. Governments bring in revenues in the form of taxes, and they have expenditures. They spend in areas such as environment, health, education and military.
How is that different from a fiscal debt? The fiscal debt is the accumulation of the fiscal deficits over time.
Let's illustrate how fiscal deficits increase fiscal debt, using a simple example. Let's review how a country can accumulate fiscal debt over five years.
In determining whether or not a fiscal debt or deficit is manageable, some economists use the following rule of thumb. If the fiscal deficit is no more than 3% of GDP, and the fiscal debt is no more than 60% of GDP, then running deficits and accumulating debts is manageable.
Spending Multiplier
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The simple spending multiplier is calculated, using a marginal propensity to consume of 90%. Spending $100 creates additional spending in the economy, and, in this case, leads to total spending of $1,000.
The simple spending multiplier calculates how much output or income is generated from every new dollar spent.
If people save 10% of all new income and spend 90%, the marginal propensity to consume is 90% or .9.
In this case, we examine what happens to the money that a government spends building a bridge. We assume that the marginal propensity to consume is 90%. The government begins hiring workers.
The spending multiplier is calculated by dividing one by the difference between one and the marginal propensity to consume. In this example, the original expenditure of $100 times 10 leads to a total expenditure of $1,000.
Government Spending
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Declining demand causes downward pressure on wages. Workers resist wage reductions. Firms lay off workers and unemployment causes problems for politicians. This video examines the delicate balance of government spending that can either under-stimulate or over-stimulate an economy.
Governments use fiscal policy to influence the economy. Fiscal policy is implemented by governments either taxing or spending.
The recession is pulling the aggregate demand curve to the left and government purchases are pulling the aggregate demand curve to the right. It is a bit of a tug of war.
When the economy is declining and aggregate demand is shifting to the left, increasing government purchases can help increase aggregate demand and help the economy out of a recession.
This assessment will test your knowledge of Public Goods.
Tax Multiplier
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The video explains the tax multiplier, using a marginal propensity to consume of 0.9. Beginning with a tax break of $100, the additional disposable income from this tax break creates an excess income of $900 in the economy.
For our example, we will analyze a $100 per week tax reduction and see how that $100 tax reduction ripples through the economy.
The increase in income due to a tax reduction is called the tax multiplier effect.
The tax multiplier’s effectiveness is largely dependent on who receives the tax breaks. Lower income families will spend a larger percent of any new income they receive in comparison to higher income families.
This assessment will test your knowledge of Public Goods.
Fiscal Policy - Taxation
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The video examines the impact of taxation on the economy. Lower taxes can leave more disposable income for consumers, which can, in turn, stimulate consumer demand and spending. In some cases, however, reducing taxes may not have the intended effect of stimulating the economy.
If the economy is experiencing inflation, the government can cut spending. When the government cuts spending, the aggregate demand curve shifts to the left and prices decline to the target price - the price at full employment.
An alternative way to reduce inflation is by increasing taxation.
If government raises taxes too much, the economy can be thrown into a recession. If governments do not raise taxes enough, then inflation will continue.
Just as raising taxes can cool off an overheated economy, lowering taxes can spur a slow economy.
Temporary tax decreases may not stimulate the economy.
This assessment will test your knowledge of Public Goods.
Population Pyramids
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The video uses the population pyramid as a demographic tool to help look at the demographic time bomb. The video explains how the shape of the population pyramid changed from being bottom heavy to being a top heavy time bomb.
The Population Pyramid is a demographic tool that helps economists understand population profiles. To graph a population pyramid, we begin by measuring age from zero to 100 on the vertical axis.
Variables change over time and major events happen. Fertility and birth rates change, major disasters and wars unfold. These factors can change a population pyramid.
In the 1960's, the birth control pill was introduced, causing fertility rates to drop. With this decline, population growth slowed and the Baby Boomers became a disproportionately large group. As time passed, the population pyramid no longer looked like a pyramid, as it became top-heavy.
This assessment will test your knowledge of Public Goods.
Solutions to the Population Pyramid
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The number of people leaving the labor force is increasing. These retirees will be supported by government pensions and health care programs that are funded by the current work force on a "pay-as-you-go" basis. The current work force may not be large enough to fund the needs.
In the 20 years after World War II, the Baby Boomers were born. Fertility rates increased during this period, and the pyramid became very bottom-heavy.
The Population Pyramid problem can be solved, but not many of the options are politically palatable.
This assessment will test your knowledge of Public Goods.
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