Unit 4: Fiscal Policy
Fiscal policy describes the government's spending and taxing decisions. The economic objective of government is to maximize social well-being while operating within a budget. The government's role in the economy is complex, and economic models attempt to account for the far-reaching effects of policy decisions. Simple one-period or static models lay the foundation for analyzing short-term effects of taxing and spending decisions. Dynamic multi-period models are then constructed to better explain the ripple effects of government policies.
Every government faces the choice to either raise revenue through taxes or borrow funds by issuing bonds. There is no one correct decision, and tradeoffs must be considered. A well-thought-out policy will incorporate external factors like the current business cycle, international developments, and demographic changes. For example, increased taxation tends to slow economic activity yet limits the amount of debt. Aside from economic considerations, optimal tax and borrowing policies must factor in the political process. A final policy is a compromise among many stakeholders, and good fiscal policy analysis is framed by political forces.
Completing this unit should take you approximately 17 hours.
Upon successful completion of this unit, you will be able to:
- build macroeconomic models to describe changes over time in monetary and fiscal policy;
- analyze the role of government in allocating scarce resources; and
- explain and use the basic tools of macroeconomic theory, and apply them to help address problems in public policy.
4.1: Static Models of Spending and Taxation
Read Chapter 6 on pages 129–141. Think about how spending and taxation affect a static model with no dynamic changes. Consider how different kinds of taxes affect the economy.
4.2: Dynamic Models of Spending and Taxation
Read chapter 6 on pages 142–151. Think about how spending and taxation affect a dynamic model, as compared to the static ones in the last section. Consider how different kinds of policies, like sustained interventions and shocks, affect the economy.
4.3: Taxes vs. Borrowing
Read chapter 6 on pages 152–154. Consider the pros and cons of borrowing and/or raising taxes to finance a deficit. When is each policy better than the other? Hint: Think about economic cycles.
Listen to Lecture 4, "Stimulus SmackDown: Can Deficit Spending Save the Economy?".
Unit 4 Assessment
- Receive a grade
Take this assessment to see how well you understood this unit.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.
