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Effect of fiscal policy - cyclically adjusted budget - Coggle Diagram
Effect of fiscal policy - cyclically adjusted budget
Evaluating fiscal policy
1) what types of fiscal policy
Expansionary?
Neutral?
Contractionary?
2) Cyclically adjusted budget
Cyclical deficit: through part of the business cycle
Cyclical adjusted budgets
Balance accounts for automatic changes in tax revenues due to GDP changes
G > T, deficit increases
Expansionary fiscal policy
Generally < the actual deficits
Assume the economy is at full employment
Critics
Problems timing
Administrative lag
Operational lag
Crowding-out effect
Current thinking on fiscal policy
Federal Reserve handle short-term fluctuations
Fiscal policy should be evaluated in terms of long-term effects
Use tax cuts to enhance work effort, investment, and innovation
Use government spending on public capital projects