馃攳
Monetary and Fiscal Policy 3 Fiscal Policy and Crowding Out - YouTube
Channel: unknown
[0]
- In this video segment,
I'm going to go ahead
[4]
and talk about a second tool
that the government
[8]
can use to change the level
of aggregate demand,
[13]
and that's the idea
of fiscal policy.
[15]
So monetary policy,
[21]
just to make sure we're clear,
[22]
monetary policy is about changes
in the money supply,
[33]
and that is executed
by the Federal Reserve,
[38]
or other central bank.
[47]
Fiscal policy is about changes
in government,
[56]
taxes, we often call tea,
[60]
or government spending,
[64]
which in our GDP
accounting equation is G.
[71]
And these are executed
[76]
through the government's tax
and budget process,
[80]
which is of course decided
by Congress
[83]
and the President
at the national level,
[87]
and state legislatures,
[90]
and governors
at the state level.
[93]
So how does fiscal policy work?
[98]
If we want to have what's called
an expansionary fiscal policy,
[107]
an expansionary fiscal policy
has as its object the goal
[114]
of increasing aggregate demand.
[117]
And remember that aggregate
demand equals GDP,
[122]
which equals consumption,
[123]
plus investment spending,
plus government spending,
[126]
plus exports, minus imports.
[128]
So, if we want
to increase aggregate demand,
[131]
we can
increase government spending.
[134]
So, tool number one,
increase government spending,
[140]
or if we cut taxes,
[143]
then we will probably increase
people's consumption spending,
[146]
and maybe depending
on what type of taxes we cut,
[149]
maybe we will increase
investment spending as well.
[158]
So, notice this one is kind
of indirect here.
[166]
And you can see
that the impact on GDP is,
[169]
you know, relatively
straight forward.
[170]
Much simpler than it was
in the case of monetary policy.
[175]
Contractionary fiscal policy
would have as its objective
[188]
a decrease in aggregate demand.
[192]
And that may sort of sound,
you know, silly,
[195]
but remember that a decrease
[197]
in aggregate demand is going to
cause a fall in the price level.
[201]
So if we have
an inflation problem,
[204]
we would probably want to use
contractionary fiscal policy.
[207]
If we have
an unemployment problem,
[209]
then we want to use
an expansionary fiscal policy.
[213]
So notice with both types
of fiscal and monetary policy,
[218]
we have a beneficial effect on
either employment or inflation,
[225]
but not
on both at the same time.
[227]
So while aggregate
demand has the,
[229]
an increase in aggregate
demand has the advantage
[232]
of increasing GDP
and decreasing unemployment,
[237]
it also has the disadvantage
of increasing inflation.
[241]
So with our contractionary
fiscal policy,
[244]
what are our tools?
[246]
Well, basically
it's the opposite
[248]
of what we did
with expansionary fiscal policy.
[251]
We can either decrease the level
[253]
of aggregate demand
by cutting the level
[255]
of government spending
in the economy,
[259]
or we can do it
by increasing taxes,
[263]
which is going to have them,
[265]
it's going to affect GDP
[266]
by causing people to cut
their consumption spending,
[269]
or possibly cut
their investment spending.
[273]
Often the government is sort
of doing multiple things
[275]
with taxes and spending
all at the same time,
[278]
so another way
of looking at this is,
[283]
if we want to increase
aggregate demand,
[288]
we want to increase the size
of our budget deficit,
[291]
because that either means
that taxes fell
[295]
by more
than government spending fell,
[298]
in which case it's
more expansionary
[301]
than contractionary.
[302]
Or, government spending rose
by more than taxes rose.
[307]
So an increase in the size
[308]
of the budget deficit is
expansionary fiscal policy.
[314]
If we want to have
contractionary fiscal policy,
[317]
then we're going to be
looking at a situation
[320]
where the budget deficit is
going down.
[324]
So this sort of makes budget
deficits look pretty appealing,
[328]
but one thing we
have to remember out there,
[330]
is we have to think
about something
[332]
like the Loanable Funds model,
[334]
and we have to remember
that a change
[336]
in the government's
budget deficit impacts the level
[339]
of national saving.
[341]
So to say that the budget
deficit goes up is equivalent
[345]
to saying that national
saving is going down.
[352]
And if national
saving is going down,
[354]
that's going to cause long run
real interest rates to go up,
[362]
and if real
interest rates are going up,
[367]
that's going to tend
to depress investment spending.
[373]
A little bit less obviously,
[375]
if real interest rates are
up higher,
[378]
then U.S. assets look more
appealing to foreign investors,
[384]
and foreign investors are
going to want to buy dollars
[387]
so that they can
invest in the U.S.,
[389]
so we're going
to have a stronger dollar
[393]
and a stronger dollar is going
to mean lower exports
[397]
and higher imports.
[398]
So these potentially might
offset some of the stimulus
[402]
that we had up there.
[403]
And it would also potentially
[405]
would impact long
run economic growth.
[407]
And that's sort of the reason
why economists say
[410]
that we do need to worry
about budget deficit somewhat,
[413]
because of this impact
on long run economic growth.
[418]
If we have a contractionary
fiscal policy,
[420]
then we're having an increase
in national saving.
[426]
And interest rates are
going to fall,
[434]
and if interest rates fall,
[435]
then we're going
to have a weaker dollar
[439]
and a weaker dollar is going
to mean higher exports
[442]
and lower imports.
[444]
Also, the decrease
in interest rates
[447]
and increase in national
saving are going to mean
[449]
that we're going to have higher
investment spending.
[453]
And overall, sort
of if you look at the impact
[456]
of budget deficits,
[458]
budget deficits boost aggregate
demand in the short run.
[462]
So they increase short
run economic growth,
[465]
but they decrease long
run economic growth.
[469]
Cutting back in the deficit,
making the budget deficit fall,
[473]
causes aggregate demand to fall,
[476]
so it causes short run economic
growth to be lower.
[481]
But it causes long run
economic growth to be higher.
[485]
So really sort of
what is an appropriate action
[488]
on the budget deficit
[489]
really depends upon the
circumstances on any given time.
[493]
If your bigger problem
that you're worried
[495]
about right now is short
run economic growth,
[498]
then a higher
budget deficit looks appealing.
[501]
If your more worried
about long run economic growth
[504]
than short run economic growth,
[506]
then a smaller
budget deficit looks appealing.
Most Recent Videos:
You can go back to the homepage right here: Homepage