Fiscal Policy. Definition Attempts by Congress to control the economy through government spending and/or tax policies Attempts by Congress to control.

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Presentation transcript:

Fiscal Policy

Definition Attempts by Congress to control the economy through government spending and/or tax policies Attempts by Congress to control the economy through government spending and/or tax policies

Two types of fiscal policy Expansionary – increased spending or decreased taxes Expansionary – increased spending or decreased taxes Contractionary – decreased spending or increased taxes Contractionary – decreased spending or increased taxes

Type of fiscal policy Changes in government spending Changes in taxes ExpansionaryIncreaseDecrease ContractionaryDecreaseIncrease

Tax policies After-tax or disposable income = income left after taxes are paid After-tax or disposable income = income left after taxes are paid Lowering taxes = increased after-tax spending Lowering taxes = increased after-tax spending Raising taxes = decreased after-tax spending Raising taxes = decreased after-tax spending

Policies can be targeted Could increase $ to education. Benefits middle class. Could increase $ to education. Benefits middle class. Could create jobs for low income earners. Benefits poor. Could create jobs for low income earners. Benefits poor. Could decrease tax rate for the wealthy. Benefits the wealthy. Could decrease tax rate for the wealthy. Benefits the wealthy. Can also target to either demand-side or supply-side of the economy. Can also target to either demand-side or supply-side of the economy.

Impacts of expansionary policy Can stimulate spending, which stimulates production (increases GDP), reduces unemployment. Can stimulate spending, which stimulates production (increases GDP), reduces unemployment. If demand-pull inflation is occurring, will make it worse. If demand-pull inflation is occurring, will make it worse. If non-labor cost-push inflation is occurring, will not make it worse. If non-labor cost-push inflation is occurring, will not make it worse.

Impacts of contractionary policy Effective when demand-pull inflation is present Effective when demand-pull inflation is present If in recession, it makes it worse If in recession, it makes it worse If prices are rising because of non-labor cost-push factors, it will hurt the economy and not reduce prices If prices are rising because of non-labor cost-push factors, it will hurt the economy and not reduce prices