The government needs to take the multiplier into account when it comes to stabilizing the economy.
The shift in aggregate demand will be larger than the initial shift.
The multiplier has been taken into account by policymakers as they develop policies for the economy.
Fiscal policy can be used by the government to change the level of GDP.
If the current level of GDP is below full employment or potential output, the government can use expansionary poli cies, such as tax cuts and increased spending, to raise the level of GDP and reduce unemployment.
It is difficult to implement stabilization policies.
Fiscal poli cies and other stabilization policies take time to operate because decision makers are slow to recognize and respond to changes in the economy.
Second, economists don't know enough about the economy to be completely accurate in their forecasts.
Although economists have made great progress in understanding the economy, the difficulties of forecasting the precise behavior of human beings, who can change their minds or act irrationally, place limits on our forecasting ability.
Poorly timed policies can cause economic fluctuations.
Suppose that GDP is currently below full employment but will return to full employment on its own within a year, and that stabilization policies take a full year to become effective.
If policymakers tried to expand the economy today, they wouldn't take effect until a year from now.
The economy would normally return to full employment in a year's time.
If stabilization policies were enacted, the economy would be stimulated and output would exceed full employment.
The problem is caused by lags.
An example of a successful stabilization policy is shown in Panel A. GDP's behavior is represented by the solid line.
When there are successful stabilization policies, they can lower output when it exceeds full employment and raise output when it falls below full employment.
If there were no lags in policy, this would be easy to accomplish.
Economic fluctuations can be reduced by successful policies.
The consequences of ill- timed policies are shown in Panel B.
Assume that policies take a year to be effective.
The economy is below poten tial at the beginning of the year.
The change wouldn't take effect until the end of the first year.
This would raise output even higher.
Ill- timed stabilization policies can cause economic fluctuations.
The time it takes to make a decision.
The time it takes for the policy to actually is something you are looking out for.
The amount of time it takes.
An example of a successful stabilization policy is shown.
Policies that are successfully timed smooth out economic fluctuations.
The consequences of ill- timed policies are shown in Panel B.
It will take a long time for your ocean liner to turn because they are large and have a lot of inertia.
There are two basic reasons for inside lags.
It takes time to identify and recognize a problem.
The data available to policymakers may be poor.
Some economic indicators look good, but others cause concern.
It can take several months to a year before there is a serious problem with the economy.
The beginning of the Great De 888-282-0476 was a good example of an inside lag.
Business leaders were not worried about the economy for a long time after the stock market crashed.
The public was not aware of the severity of the depression until late in 1930.
Once a problem has been diagnosed, it still takes time before the government can take action.
Any changes in taxes or spending must be approved by both houses of Congress and the president in order for fiscal policy to be delayed.
Political opponents have been preoccupying with disagreements about the size of the government and the role it should play in the economy, making it difficult to reach a consensus on action in a timely manner.
President Bill Clinton posed an expansionaryStimulus package as part of his overall budget plan after he was inaugurated in 1993.
The spending programs contained in the package were designed to increase GDP and prevent a recession.
The plan was attacked as unnecessary and wasteful.
M10_OSUL5592_09_GE_C10.indd 235 grew quickly in the next few years.
It is difficult to develop expansionary fiscal policies in time to have the effect we want.
The time it takes for policies to become effec tive is also subject to outside lags.
It takes time for individuals and businesses to change their spending plans to take advantage of tax cuts.
It will take a while before spending increases raise GDP.
Outside lags in fiscal policy are not very long.
The economy tends to work quickly with the multiplier effects.
They can use models to estimate lags.
A model predicts that an increase in government spending will increase GDP in 6 months.
The problem of lags is worse because economists are not very accurate in forecasting what will happen in the economy.
When the economy appears to be slowing down, policymakers have a classic problem of knowing whether the downturn will be short or long term.
stabilization policy can't be effective without accurate forecasting.
If the government adopts a contractionary policy and economic forecasters predict an overheated economy, the economy will weaken before the policy takes effect.
Most economic policymakers understand the limitations and are not fond of using activist policies.
It would increase the tax burden on future workers and businesses.
The government should save and invest now to increase GDP in the future, according to some economists.
Saving and investment would increase GDP and entitlement payments would grow along with it.
The burden of taking care of older adults wouldn't change much.
As life expectancies increase, the population ages, and new placing more responsibility on individuals and families for their medical technologies become available to help people live retirement and well-being.
Increasing the spending age at which retirement benefits begin to be paid will encourage individuals to spend more years in the labor force, as economists and budget analysts predict that spending age at which retirement benefits begin to be paid will grow extremely encourage individuals to spend more years in the labor force.
We could try to reform the health-care system to encourage more people to use it.
Competition is estimated to reduce health-care expenditures.
It would be difficult to make these changes.
It is possible to leave the existing programs in place and not raise taxes to pay for them.
Policymakers will need to take steps soon to cope with two implications of this strategy.
If we kept the federal share of the challenge.
Exercise 2.8 is related to it.
The framework for fiscal policy is provided by the main elements of spending and revenue for the U.S. federal.
The federal budget is large, and the programs that the federal government supports are very complex.
Federal taxes made up 15% of GDP.
The US has a 300 million population and federal spending is $12,000 per person.
The best way to begin to understand the scope and complexity of the U.S.
The fiscal year began on October 1, 2010, and ended on September 30, 2011.
Government services and taxes are provided by states and local governments.
Welfare and health care for the poor are funded by the federal government and state governments, and some important services, such as education, are primarily funded by state and local governments.
Our focus in this chapter is on federal fiscal policy, so we focus on federal spending and taxation.