SSEMA3-Explain how the government uses fiscal policy

The use of government spending and revenue collection (taxes) to influence the economy. Purpose

Fiscal Policy Goals Influence economic growth Achieve full employment Maintain price stability (control inflation) Fiscal Policy Goals

Secretary of the Treasury the President’s chief economic advisor Congress Who controls it?

Government Spending Taxes Fiscal Policy Tools

Fiscal Policy Expansionary Contractionary Reduce Taxes Increase Government Spending Increase Taxes Reduce Government Spending Fiscal Policy

Expansionary Effects This is often used during a recession. The intent is to: 1. boost Aggregate Demand and/or Supply 2. Increase GDP 3. Reduce Unemployment Expansionary Effects

Contractionary Effects This is often used during an expansion. The intent is to: 1. Decrease Aggregate Demand or Supply 2. Decrease inflation Contractionary Effects

Who Fiscal Policy Affects Demand Side Supply Side To help households and increase AD Usually in the form of tax breaks, spending in gov’t programs, and job creation To help businesses and increase AS and create jobs Usually through tax breaks and subsidies Who Fiscal Policy Affects

Limitations Difficulty of changing spending levels Predicting the future Delayed results Political pressures Coordinating fiscal policy Limitations

The idea that increased spending by consumers, businesses, or government becomes income for someone else. Multiplier Effect

Fiscal Policy Theories Classical Economics Free markets regulate themselves Very limited use of fiscal policy (laissez-faire) Problem: How long can we afford to wait for an economy to return to market equilibrium? Adam Smith Fiscal Policy Theories

Fiscal Policy Theories Keynesian Economics (Demand Side Economics) Demands for goods drives the economy Increase government spending to avoid recession Decrease government spending to control inflation Increase taxes to control inflation Decrease taxes to boost the economy Focuses on Aggregate Demand John Maynard Keynes Fiscal Policy Theories

Fiscal Policy Theories Supply-side Economics Supply of goods drives the economy Tax cuts increase employment and total output Less government intervention in the economy is better Focuses on Aggregate Supply Milton Friedman Fiscal Policy Theories