Fiscal Policy The government helping stabilize the economy through taxing, spending, and borrowing.

Four main areas of learning History Tools Taxes Inflation/Recession

HISTORY Fiscal policy was born in What economic problem was occurring?

Before Classical Economics 2. Adam Smith 3. No government involvement in the economy 4. Low debt/taxes 5. No assistance programs 6. Government doesn’t provide economic stability.

One good thing One Bad thing

After FDR elected 2. John Maynard Keynes 3. Government should spend money to promote growth and stability during downturns. 4. FISCAL POLICY BORN – government taxing, spending, and borrowing programs to promote economic stability 5. Government assistance 6. Possibility of higher debt/taxes

One good One bad

Keynesian = Fiscal Policy  Fiscal Policy – government’s taxing, spending, borrowing policies to stabilize the economy  Discretionary – Congressional changes in Fiscal Policy

Discretionary FP Changes made to Fiscal Policy by Congress

POSTER Choose either Classical or Keynesian to support. Create a poster supporting your theory of choice. It must include: 1. Your theory name 2. A visual 3. A slogan

TOOLS This is referencing what the government uses to fight inflation or recession

#1Tool  Spending  Federal budget – income versus your expenses listed  Balanced budget – income = expenses  Budget surplus – income is greater than expenses  budget deficit – income is less than expenses  Deficit spending – borrowing money to cover expenses  National debt – a result of deficit spending. Accumulation of debt  Most budgets are set on a Fiscal Year – an accounting year for businesses.

#2 tool  Taxes – government income

#3 tool  Borrowing – to promote growth, the government can borrow money to fund programs that will stimulate the economy.

#4 tool  Automatic stabilizers  Government programs that were created to automatically fight inflation/recession.  Example – income tax

#5  Supply side economics – using businesses to fix the economy  Demand side economics – using consumers to fix the economy

“taxes”  A tax is a payment to the government. Our income is taxed and we have to pay a sales tax on purchases at the store.

3 types of taxes 1. Progressive tax  As income increases, so does the amount of tax that we have to pay.  Example – income tax

#2 Proportional Tax  A tax that is the same percentage for all  Example – sales tax and an excise tax. An excise tax (sin tax) is levied on gas, tobacco, alcohol, and the lottery.  Fair tax is a hot topic!  Fairtax.org

#3 Regressive Tax  A tax that hurts the lower income consumer because it is harder for them to pay it due to their low amount of disposable income.  Example, sales tax and excise tax

Change in tax structure movement… Some people do not like the current income tax. Therefore, an idea was created as a substitute for the income tax. It is a national based sales tax which would eliminate the income tax. Look at

Writing assignment  After going over tax information, do you believe that the tax structure should stay the same or change? Do you believe we should keep the income tax (progressive) or eliminate it and only have a nation wide sales tax?  This must be at least 7 sentences. You must have three reasons to support your opinion.

Flap  Inflation and Recessions

Fiscal policy InflationRecession too much moneynot enough goal: lower ADgoal: Increase AD GDP, CPI higherGDP, CPI low

Inflation Restrictive Fiscal Policy (Contractionary FP) Taxes Spending Borrowing Automatic stabilizers (welfare, unemployment go down)

Recession Expansionary Fiscal Policy Taxes Spending Borrowing Automatic stabilizers increase on welfare and unemployment

Review FED  Name one tool the FED would use to fight recession and tell how they would use it.  Name one tool the FED would use to fight inflation and tell how they would use it.

Fix it! GDP is low, CPI is low, Unemployment is high. Would FP… Lower taxes Increase taxes

Fix it Expansion in the market Increase spending Decrease spending

FIX IT When would Fiscal policy increase borrowing? Inflation Recession

Fix it During a recession, what economic policy would promote stability in the market? a. Fed raise Reserve requirement b. Government raise taxes c. Government lower borrowing d. Fed lower Reserve requirement

Fix it If policy was being directed towards the producer and the government is using Contractionary Fiscal policy, who is the Government using to help stabilize the economy and what is the economy experiencing? a. Supply side, recession b. Demand side, recession c. Demand side, inflation d. Supply side, inflation

Fix it If GDP is low, what would the FED do to promote economic growth? a. Increase the reserve requirement b. Increase the Federal funds rate c. Decrease the discount rate d. Decrease taxes

Fix it People have found that they are paying more income taxes. What term best describes this situation? a. Supply side economics b. Expansionary fiscal policy c. Restrictive fiscal policy d. Tight money policy