The use of government spending and taxation to stabilize the economy. Fiscal Policy The use of government spending and taxation to stabilize the economy.

Who manages the nation’s finances? The President and Congress are responsible for the nation’s financial affairs. The President submits a budget to Congress for approval and Congress authorizes spending. Through fiscal policy the government can influence economic activity

2 Tools of Fiscal Policy The President and Congress have two tools to use to influence economic activity. 1. Taxes 2. Spending

Expansionary Fiscal Policy If the nation is in a recession, and the gov’t wants to stimulate the economy they can: Lower taxes (gives people more money to spend) Increase government spending (helps boost the economy

Multiplier Effect The idea that increased spending by consumers, businesses, or government becomes income for someone else. When this person spends the income, it becomes income for someone else, and so on, leading to increased production in an economy. Keynesian Economics

Effects of Expansionary Fiscal Policy Government buys more goods and services Businesses earn more profits and hire more workers Businesses have more money to spend Business and worker spending results in businesses hiring more workers More jobs and increased output (GDP)

Contractionary Fiscal Policy If the government wants to slow the economy it can Raise taxes Decrease government spending (reduces demand and helps curb inflation)

GPS Correlation SSEMA3 The student will explain how the government uses fiscal policy to promote price stability, full employment, and economic growth. a. Define fiscal policy. b. Explain the government’s taxing and spending decisions.

Activity – A Two Act Play You will participate in a two act play that illustrates fiscal policy. This play is a little different from others – you have to write your own lines. Your group will either perform Act 1 or Act 2. Group members should choose parts and prepare a few lines to use in acting out the roles. You have 15 minutes to prepare your act (write your lines, and practice with your group) Be creative, but stick to the ideas in the script.