Fiscal Policy Fiscal policy is changes government makes in spending or taxation to achieve particular economic goals.

Fiscal Policy  President and Congress  Responsible for influencing the economy through policies of taxing and spending

 What is Macroeconomics? Yale Prof explains What is Macroeconomics? Yale Prof explains

Fiscal Policy And Invisible Hand  Adam Smith believed individuals maximizing their own good through trade and entrepreneurship benefits society as a whole  government intervention in the economy isn't needed  the invisible hand is the best guide for the economy

Fiscal Policy History  Things chugged along nicely until 1929 and the Great Depression when the business cycle didn’t recover as fast as we’d hoped

Fiscal Policy History During the Great Depression, British economist John Maynard Keynes said, “In the long run we are all dead.” The government should use their power to tax and spend to stimulate the economy and lessen suffering.

Fiscal Policy History Continued  The goal of Keynesian Theory during a depression?  curb inflation (keep it between 2-3%)  increase employment  maintain a healthy value of money.  When inflation is too strong, the economy may need a slowdown

Keynesian Economic Theory  States that governments can influence macroeconomic productivity levels by increasing government spending and decreasing taxes when times are bad OR  Decreasing government spending and Increasing taxes when times are good. EOC study guide Macroeconomics #10

The Great Recession

Fiscal Policy  GDP = C + I + G + Xn  Fiscal policy is the government’s use of G and T to affect aggregate demand in order to stabilize the economy

Economic Stimulus Act of 2008  Intended to boost the United States economy and to avert a recession  Signed into law on February 13, 2008 by President Bush with the support of both Democratic and Republican lawmakers.  Provides for tax rebates to low- and middle-income U.S. taxpayers, tax incentives to stimulate business investment, and an increase in the limits imposed on mortgages eligible for purchase by government- sponsored enterprises  Total cost of this bill was projected at $152 billion

American Recovery and Reinvestment Act of 2009  In response to the Great Recession, it’s the primary objective was to save and create jobs  Its secondary objectives were to provide temporary relief programs for those most impacted by the recession and invest in infrastructure, education, health, and renewable energy.  Approximate cost of the economic stimulus package was estimated to be $800 billion  It included direct spending in infrastructure, education, health, and energy, federal tax incentives, and expansion of unemployment benefits

Definitions 'Expansionary Fiscal Policy'  An increase in government spending Or  A reduction in taxes EOC study guide Macroeconomics #12

Increasing Government Spending Causes Inflation and Raises Interest Rates

Definitions 'Contractionary Fiscal Policy’  A decrease in government spending Or  An increase in taxes EOC study guide Macroeconomics #13

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Fiscal Policy Problem/Solution  When the US has high unemployment rate what can Congress do to lower it? EOC study guide Macroeconomics #20

Fiscal Policy Problem/Solution  Unemployment is extremely high  What can Congress do?  Expansionary Fiscal Policy:  Congress could increase government spending  Lower taxes EOC study guide Macroeconomics #20 cont.

Fiscal Policy Problem/Solution  Venezuela has high inflation rates  What can their government do to fix it? EOC study guide Macroeconomics #20 cont.

Fiscal Policy Problem/Solution  Venezuela has high inflation rates  What can their government do?  Contractionary Fiscal Policy:  Decrease government spending  Raise taxes on businesses and individuals EOC study guide Macroeconomics #20

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