FISCAL POLICY uGuGOVERNMENT POLICY ON TAXATION AND SPENDING uCuChanges AD (G and C) uUuUsing government spending and taxes as tools to cause business cycle changes. uCuChanges have a “multiplied” effect on output

Expansionary Fiscal Policy u Increase Government Spending u Decrease Taxes u Increase G and / or decrease taxes u Used to fight unemployment and business cycle contractions u The multiplier (switch powerpt)

Contractionary Fiscal Policy u Decrease Government Spending u Increase taxes u Decrease G and increase taxes u Used to fight inflation

Impact of Fiscal Policy changes on budget and debt u Expansionary FP moves the budget towards a deficit and tends to increase national debt u Contractionary FP moves the budget towards a surplus and tends to decrease national debt

Balance Budget Fiscal Policy u Increasing government spending and taxes by the same amount u Doing so leaves the budget surplus / deficit unchanged u Since the Government Spending Multiplier is larger than the Tax Multiplier, this does have an expansionary effect.

Discretionary Fiscal Policy u Fiscal Policy action enacted by deliberate action of the governmental unit

Automatic Fiscal Policy (automatic stabilizers) u Fiscal Policy actions that change automatically with changes in real output u Examples

Limitations of Expansionary Fiscal Policy u The multiplier is limited by price level changes u Government borrowing may offset the impact of expansionary fiscal policy (crowding out, Ricardian Equivalence, international trade)

Laffer Curve u F.B F.B