Fiscal Policy. What is fiscal policy?  The setting of the level of government spending and taxation by government policy makers. (Clifford Video)Clifford.

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Presentation transcript:

Fiscal Policy

What is fiscal policy?  The setting of the level of government spending and taxation by government policy makers. (Clifford Video)Clifford Video  Tax and Spend Review  Chapter 8  Chapter 12 (Packet Review & Tax Article)  IOUSA Deficits 1. Budget 2. Savings 3. Trade 4. Leadership (Ron Paul)Ron Paul

Tools of Fiscal Policy  Influences on aggregate demand  Increase in government purchases  Decrease in taxes  Multiplier Effect (Clifford Video)Clifford Video  The additional shift in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending.  Marginal Propensity to Consume (MPC)  Multiplier = 1/ (1-MPC)  Crowding Out Effect  The offset in aggregate demand that results when expansionary policy raises the interest rate and thereby reduces investment spending

Tools of Fiscal Policy  Tax cuts  AD  Increase tax home pay= increase consumer spending  Multiplier and Crowding Out  SRAS  “Supply siders”  Permanent vs. Temporary Cuts  Automatic Stabilizers  Changes in fiscal policy that stimulates AD when the economy goes into recession w/o policymakers having to take any deliberate action  Taxes (lower income = lower taxes)  Spending (welfare, unemployment) Paul Solman “Making Sense”

Fiscal Policy: Problems and Applications  Question 4: Impact of Tax Cuts  Question 8: Taxes and MPC  Question 12: Automatic Stabilizers

Question 4

Question 8

Question 12