What is Fiscal Policy Unit 15.1

Fiscal Policy Tools Fiscal Policy are the collective actions of government to collect and spend money. Expansionary Fiscal Policy Grow economy and increase employment Contractionary Fiscal Policy Combat Inflation Discretionary Fiscal Policy Automatic Stabilizers Public Transfer Payments Progressive Income Taxes

Expansionary and Contractionary Fiscal Policies Expansionary Fiscal Policies are intended to expand the economy, by reducing taxes, and/or increasing government spending. Contractionary Fiscal Policies are intended to contract the economy, by increasing taxes, or reducing government spending.

Limitations of Fiscal Policy Policy Lags Time to get through Congress Timing Issues Business Cycle Rational Expectations Theory You don’t always get what you want Political Issues Council of Economic Advisors Regional Issues

By lowering taxes, the government can increase either demand, Expansionary policies are intended to grow the economy and increase output. This reduces unemployment, but also raises the risk of inflation. $ Output (GDP) Aggregate Demand 1 Supply Demand 2 Increasing Demand Supply 1 Supply 2 By lowering taxes, the government can increase either demand, or supply. Also, the government can directly increase demand by doing the buying itself, or supply, by providing direct services. For example, the government lowers taxes to families, which increases domestic spending, which increases demand.

A contractionary policy is intended to slow economic growth, to prevent inflation. The unintended result can be stalling the economy or creating a recession. Contractionary policy also increases unemployment. $ Output (GDP) Aggregate Demand 1 Supply Demand 2 Decreasing Demand Supply 1 Supply 2 By increasing taxes or reducing spending, the government can decrease demand or supply. For example, if the government raises taxes on businesses, this will make it more costly to produce goods, and they will produce fewer goods, or raise the price of their goods.