Lecture 16
Macroeconomics

Opening
Prayer

Quiz Master

Chapter 17
The Government Budget
Taxes and Spending

Two Objectives
Unemployment
Inflation

Monetary
Central Bank
Tools
Reserve Ratio
Discount Rate
Open Market
Excess Reserve Rate
Fiscal
Government
Tools
Taxes
Spending
Aggregate Demand
Aggregate Demand
Aggregate Supply

Tax Revenues
Income Taxes
Social Security Taxes
Other

Types
Per Head
Flat
Progressive

Corporate Tax Rate
21% Flat Rate

Progressive
The more you earn, the
higher the rate

Types
Income
Sales
VAT
Property
Excise

De
fi
cits and Debt
Government
Spending and
Revenue

De
fi
cit
Spending greater
than revenue

Balanced Budget
Spending exactly
equals revenues

Surplus
Revenue greater
than spending

Debt
Accumulated deficits

Debt
$24 trillion
$72,700 per person

Why would you want
government to go into
debt?
Don’t have to pay
Future larger economy

Debt
Investment
Only if the return is
higher than the
interest rate

Chapter 18
Fiscal Policy

P4
Price
Level
Real GDP orY
Fiscal Policy and Negative Supply Shock
18
Long Run
Aggregate
Supply Short Run
Aggregate
Supply
19
P1
Aggregate
Demand
17
P2
P3
In
fl
ation and
Recession
Stag
fl
ation

P2
Price
Level
Real GDP orY
Increase Aggregate Demand
Lower Taxes and/or Increase Spending
18
Long Run
Aggregate
Supply
Short Run
Aggregate
Supply
19
P1
Aggregate
Demand
17
Unemployment

P3
Price
Level
Real GDP orY
Decrease Aggregate Demand
Raise Taxes and/or Decrease Spending
18
Long Run
Aggregate
Supply
Short Run
Aggregate
Supply
19
P1 Aggregate
Demand
17
In
fl
ation

Where does
government get
money?
Crowding Out

More Taxes
Cancel
No effect

More Borrowing
Crowding Out
Increase interest
rates

Lower Taxes
People may just save
more and not spend

More Spending
Now get free stuff.
No new spending

Get a free iPhone
But your taxes
will go up to
pay for it
No change in total
spending

Where does
government get
the money?

GDP
= C + I + G + X - M

If there are inactive capitals
Output will increase
If all capitals are active
Prices will increase