Fiscal Policy SSEMA3 Explain how the government uses fiscal policy to promote price stability, full employment, and economic growth.

FISCAL POLICY By changing the amount of taxes people pay or the amount of spending by the government, fiscal policy influences economic activity in the circular flow of the economy and can stabilize business cycle fluctuations, thus achieving our economic goals.

Define FISCAL POLICY #1) Government actions (taxing and spending) to stabilize the macroeconomy and meet the macroeconomic goals. #2) WHO? At the federal level fiscal policy is the legislation, passed by Congress and signed into law by the President, dealing with taxation and the budget (spending) Summary: By changing the amount of taxes people pay or the amount of spending by the government, fiscal policy influences economic activity in the circular flow of the economy and can stabilize business cycle fluctuations, thus achieving our economic goals. State and local governments also use changes in taxes or spending to influence economic activity. TL;DR Fiscal policy are actions by the federal government to influence the economy

#3 How is fiscal policy related to the macroeconomics goals? The government will change it’s taxing and spending actions to try to meet the goals. For example: Economic Growth - govt. Would cut taxes to encourage economic growth. GDP = C + I + G + Xn C increasing, therefore GDP increasing, therefore, economic growth

Example of promoting goal Economic growth Government spending increased GDP=C+I+G+Xn G increased, therefore GDP increased = economic growth

#4 How does the macro economy react to tax cuts Individual Tax cuts = consumers have more money to spend (C+I+G+Xn) Because C increases, GDP increases Business tax cuts = Firms have more money to spend (C+I+G+Xn) Because I increases, GDP increases

#5 How does the economy react to tax increases Raises taxes on households C will decrease, and GDP will decrease (contract)

#6 How does the economy react to “increased government spending?” C+I+G+XN…….“G” increases, therefore GDP increases --- You should get Economic Growth

#8 Expansionary Fiscal Policy An expansionary policy is meant to correct a contraction on the business cycle, increasing output (GDP) and eliminating cyclical unemployment *Cut Taxes *Increase Spending You EXPAND (expansionary FP), during a contraction!

Expansionary Fiscal Policy - which goals? Economic Growth Full Employment An expansionary fiscal policy would be done during a recession (contraction) or trough on a business cycle

#10 Contractionary Fiscal Policy During an expansion, inflation may be a concern, so the government could raise taxes and/or cut spending to “cool” (contract) the eocnomy and meet the goal of price stability *raise taxes *cut spending A contractionary policy is used during an expansion on the business cycle

Goal of a conractionary fiscal policy Price stability (curbing or decreasing inflation) Contractionary FP would be done during an expansion or peak on the business cycle when inflation (price level) is very high

#15 What is the difference between the national debt and government budget deficits? Deficit - When spending is greater than income (tax revenue) Debt - Deficit spending becomes debt

DO NOW: Step 1 *Draw and label a business cycle (make it big, use the entire side of a paper) Include each of the following (1 time each): PEAK, TROUGH, EXPANSION, CONTRACTION, RECESSION YOU HAVE 5 minutes to complete….

Next, label one instance on the business cycle for each of the following (just write the arrow and initials): ↑UR (Increasing unemployment rate...people loosing jobs) ↑GDP (Increasing GDP) ↑I (increasing inflation rate) FE (Full employment, approximately 5% unemployment rate) ↓GDP (shrinking GDP) ↓IR (inflation is low/normal, around 2-3%)

Fiscal Policy Actions - label one place where the following could be done (write the abbreviation): CP ↑Tx (Contractionary Policy -Increase Taxes) CP ↓Gsp (Contractionary Policy -decrease govt. spending) EP↓Tx (Expansionary Policy - cut taxes) EP↑Gsp (Expansionary Policy - increase govt spending)

DO NOW - 12 minutes Quizizz (join quizizz) over what we learned on Monday and Tuesday For a classwork grade 475507

Warm Up Look up the “American Recovery and Reinvestment Act” When? What was it, what were its goals?

Classwork: My essay about Fiscal Policy 5 paragraphs 1st paragraph: Define Fiscal Policy, who does it and the goals it is trying to achieve. 2-4 paragraph: Tell about the tools (taxes and spending) and explain the difference between an expansionary (tax cuts and increased govt. spending) and contractionary (increased taxes and decreased govt. Spending fiscal policy. What goals does an expansionary policy attempt to meet? (economic growth and full employment) What goal does a conractionary policy attempt to meet? (price stability) 5th paragraph: Explain how the ARRA was an example of fiscal policy

American Recovery and Reinvestment Act 2009 - in response to the recession Example of expansionary fiscal policy Congress passed and Prez signed into law a series of tax cuts and increased government spending meant to stimulate the economy.