FiscalPolicy

new industries - prices of farm product fell
and new - workers could not buy goods as

methods of fast as the industry produced them
production led because their wages were low.
to prosperity - workers reduced their spending to
hold down their debts
more people Stock Market Crash
invested in the
- left millions of people in debt
stock market
- stopped making new purchases
- big drop in consumer spending
Installment - nations could not repay their debts
buying - scarce credit
- less borrowing
- lower prices
- more bankruptcies
Effects of the Depression
- Stock values plummeted
- stockholders were wiped out
- banks and factories shut down
- millions of Americans were left jobless and penniless
- the banking system had collapsed
- nearly 25% of the labor force was unemployed,
- prices and productivity had fallen
- reduced prices and reduced output
- lower incomes in wages, rents, dividends, and profits
- factories were shut down
- farms and homes were lost to foreclosure, mills and
mines were abandoned
- people went hungry.
- inability of the people to spend or to save
Solution
- imposed rationing
- recruited 6 million defense workers
(including women and African
Americans)
- drafted 6 million soldiers
- ran massive deficits
Government Expenditure
Fiscal Policy
change in government expenditure

change in tax
change in transfer payment
Aggregate Demand Affects Production or GDP
Macro Problem: Weak Economy (Unemployment)
Policy Strategy: Fiscal Stimulus
- Increase GE
- Decrease Tax
- Increase Transfer Payment
Macro Problem: Overheated Economy (Inflation)
Policy Strategy: Fiscal Restrain
- Decrease GE
- Increase Tax
- Decrease Transfer Payment
Macro Problem: Weak Economy (Unemployment)
Policy Strategy: Fiscal Stimulus
Fiscal Options Amount
Increase Gov't Purchases Desired FS AD shortfall

multiplier
Cut Taxes DFS
MPC
Increase Transfer DFS
Payments MPC
Macro Problem: Overheated Economy (Inflation)
Policy Strategy: Fiscal Restraint
Fiscal Options Amount
Reduce Gov't Purchases DFR excess AD

multiplier
increase Taxes DFR
MPC
Reduce Transfer DFR
Payments MPC
The recession in major export markets squeezed
Philippine export revenues. Export receipts from
January to November 2009 contracted by 24.6
percent to 35 billion U.S. dollars, while the industry
sector fell 2 percent. That, combined with the
typhoons Ketsana (0ndoy) and Parma (Pepeng) that
slashed farm production in the fourth quarter and
slowed full year farming, fishery and forestry growth
to 0.1 percent, battered last year's economic
performance.
The official GDP figures, which were released by
the government on Thursday, hit the lower end of the
official target of 0.8-1.8 percent year-on-year growth.
source:http://english.peopledaily.com.cn
How much Fiscal Stimulus is Need?
Year GDP target Expected GDP Gap
In millions Fall In millions
2009 1,654,753 1.8% 29785.54
MPC of the Philippines is=0.835 source:ww.gsid.nagoya-u.ac.jp

Seatwork
◼ The government wants to decrease
aggregate demand to P300B to lessen
inflation. If the MPC is 0.90, how much
government purchases or taxes should be
restraint to solve the inflation? (show your
solutions and explain your answer)
Inefficiency of Fiscal Policy
◼ Crowding out
A reduction in private-sector borrowing (and
spending) caused by increased of government
borrowing.
◼ Time Lags
 Types of Time lag:
◼ Recognition Time Lag – government difficult to
recognized recession
◼ Action Time Lag – the process of applying
◼ Effect Time Lag –the effect of the fiscal policy
◼ Pork Barrel Politics

Economic Effects of Deficit
(too much fiscal stimulus)
◼ Burden of Debts
 Kinds of debts
◼ Internal Debts
Treasury bonds or bills (T-bills /T-
bonds/securities)- can create crowding out
◼ External Debts
 No crowding out if debts are repaid with
exports of real goods and services
Refinancing
- The issuance of new debt in payment of
debt issued earlier
◼ Burden of Debt
Debt Service
◼ Theinterest required to be paid each year
on outstanding debt
◼ Burden of Debt
Opportunity Cost
◼ CrowdingOut
◼ Economic Growth
Ifdebt-financed government spending crowds
out private investment, generations will bear
some of the debt burden
 Refinancing hurdles economic growth
◼ Deficit/ Debts Ceiling
 An explicit, legislated limitation on the
size of the budget deficit/ debt
Economic Effects of Surplus
◼ Crowding in
◼ Potential Uses of budget Surplus
 Spend it on goods and services
 Cut taxes
 Increase money Transfer
 Pay off old debt (save it)
Fiscal/Monetary Policy and
Business Cycle
Output/ real GDP Prosperity Recove
ry
ve r y
Reco
Depression
Depression
Recession Recession
Year
Fiscal/Monetary Policy and
Business Cycle
Prosperity RestraintR
Output/ real GDP ecover
y
ve r y
Reco
Depression Stimulus
Depression
Recession Stimulus
Recession
Year
◼ With fiscal and monetary inefficiency
how/which/what policy can stabilize that
economy?
Fiscal Policy over Monetary Policy
◼ Short Run Business Cycle

◼ Inflation
Monetary vs Fiscal
◼ Easier to implement ◼ Difficult to Implement
◼ Slower Effect ◼ Faster Effect
icy Mo net
l
l Po . ary
a Objectives of the
Po
c
Fis
Economy:
licy Fis
MACROECONOMICS
.
 Increasing Production
.
y
 Stable Price
lic
 Low unemployment
o
ca
P
 Balance of Payment
lP
y
ar ol
t icy
Mone
.
References:
◼ Samuelson,Paul and Norchaus, Willian (2005), Economics. 8th ed.,
McGraw-Hill International Edition.
◼ Schiller, B.(2010), Essential of Economics. Boston:McGraw-Hill.
◼ http://www.ntrc.gov.ph/files/Chapter-I-Income-Taxes.pdf
◼ http://www.bir.gov.ph/
--------------------------------------------------
This presentation is adapted by J. Cassion II from Belinda P. Ato – Candelario
& Daphne S.Magtibay

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new industries - prices of farm product fell

and new - workers could not buy goods as

change in government expenditure

Increase Gov't Purchases Desired FS AD shortfall

Reduce Gov't Purchases DFR excess AD

MPC of the Philippines is=0.835 source:ww.gsid.nagoya-u.ac.jp

◼ Effect Time Lag –the effect of the fiscal policy

◼ Pork Barrel Politics

◼ Short Run Business Cycle

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