Chapter 24: Fiscal Policy
1. Emphasize that taxes and transfer payments are different ways of changing net taxes, each of which
2. An interesting historical example involving different ways of changing net taxes was the 1984 Reagan–
3. Make sure students recognize that budget deficits are not a measure of the size of government, but of
the difference between government spending and taxes. The government can grow in size at the same
time that the deficit can fall.
4. Emphasize that for fiscal policy, the deficit or surplus that matters is that of all levels of government
together, not just the federal government, and that changes in state and local government purchases
5. Make sure students recognize that the multiplier consists of income–induced changes in consumption,
6. You may want to create a table showing various MPCs and their corresponding multipliers (chosen for
7. As an extension of the multiplier, you may want to spend a little time showing intuitively how income
taxes reduce the multiplier (a change in income leads to a smaller change in disposable income and thus
8. Make sure students understand why a change in net taxes has a smaller effect than an equivalent
9. To reinforce understanding of the MPC and APC, you might ask students how fears of a collapse in
the Social Security system could affect it (it would tend to increase private savings and therefore reduce
both MPC and APC).
10. Emphasize that the lag problem will create difficult timing and forecasting issues for attempts to
stabilize the economy.
11. Note that the discussion of expansionary and contractionary fiscal policy implies that government
12. Note to students the differences in effects between explicitly one-time changes in taxes versus
permanent changes in tax rates, because of the difference in expectations about future disposable
income that result.
14. You may want to extend the crowding-out analysis to include a discussion of the determinants of how
large the crowding-out effect will be (e.g., How much will interest rates change? How responsive will
desired investment be to changes in the interest rate?)
15. Because of the greater complexity of the open economy crowding-out analysis, you may want to also
16. Note that the text discussion implies a preference for changes in net taxes over changes in
government purchases, if the speed with which the effects are felt is of particular importance.
17. Emphasize that automatic stabilizers trigger changes that both begin and end soon after business
18. In the supply side discussion, it is worth emphasizing that the determinants of the LRAS (PPF) are all
19. The supply-side effects of tax rates on worker can be shown clearly in terms of the 1980s tax rate
reductions effects on take-home pay. A given percentage reduction in a higher tax rate (e.g., from 70%
20. The effect of taxation on saving incentives can be illustrated by the attraction of 401k plans and other
deferred tax savings vehicles, as well as Roth IRAs, which can compound in a tax free manner.
21. Note that in a recession, different groups could agree that tax cuts are a good idea, but for different
22. As a supply-side fiscal policy example, you could discuss how phasing in a tax rate cut over time
23. Make sure students see why government debt held by other government agencies imposes no net
burden on American taxpayers.