EOCT Review Question #1  During what stage of the business cycle would frictional unemployment be the largest? A.Peak B.Recession C.Trough D.recovery

EOCT Review Question #2  If we have progressive tax system and Billy pays $ on his $10,000 income, what is true of Sue’s tax liability if she earns $40,000.00? A. It is exactly $4, B. It is less than $4, C. It is more than $4,000.00

EOCT Review Question #3  Which of the following would cause cost- push inflation? A. 20% increase in natural gas prices B. 20% growth in the stock market C. 20% cut in federal income tax D. 20% increase in grain production

EOCT Review Question #4  Which group is most likely to suffer from higher rates of unemployment and poverty than most others? A. Minorities B. People with limited education C. Single parents D. Two-parent families

Fiscal Policy Chapter 15

Points to Remember  Prior to the Great Depression economists believed that the best way to stabilize the economy was through the natural market forces  Adam Smith and supply side economics

After the Great Depression  Remember: –Keynes –government needs to aid the economy –demand side economics

Fiscal “Tools” 1.Government Purchases/Spending 2.Transfer Payments 3.Taxes …and how these three affect macroeconomic variables such as real GDP, employment, the price level, and economic growth Know these!

What is Fiscal Policy?  Government taxing and spending used to move the economy toward full employment with price stability  the maximum sustainable output in the long run given the supply of resources, technology and “rules of the game” that nurture production and exchange  Potential output- the maximum sustainable output in the long run given the supply of resources, technology and “rules of the game” that nurture production and exchange –AKA- full employment output and price stability Remember the PPF? How could this relate to your study habits?

$200 How just a little Fiscal Policy can effect our economy in a BIG way. $150 $150 $50 (already in his pocket) $200 already in his pocket) $400

Multiplier Effect  For every dollar spent by the federal government, GDP will increase by more than that $1.  This could also be affected by business invention or change in consumption - but Keynes focused on the government’s role in his book General Theory.

Fiscal Policy and Taxes  An increase in tax rates = decreased disposable income = consumption & real GDP decrease  A decrease in taxes = increases disposable income = consumption & real GDP increase  What is disposable income?

Fiscal Policy and Taxes Taxes Disposable Income Consumption & Real GDP Taxes Disposable Income Consumption & Real GDP So which is better HIGHER or LOWER TAXES? WHY?

Disposable Income  This is the income available after taxes  This is the money consumers have to spend  Less taxes = more money to spend SAY IT WITH ME: “We like Disposable Income!”

Quick Review  What are the 3 components of fiscal policy?  What will higher taxes result in?  What is the multiplier effect?  What is disposable income?

EOCT Review… C + I + G + (X – M) = GDP How do they calculate the GDP?

EOCT Review… What happens to the GDP in each of these scenarios? What aspect of GDP is affected and how? What happens to the GDP in each of these scenarios? What aspect of GDP is affected and how?  The government decides to hire 3,500 new employees to work as park rangers.  Consumers by fewer American made cars, and more Japanese made cars.  Businesses are optimistic about the future, they begin to build more factories  Due to better economic conditions in Europe, Europeans purchase more American goods and services.

Government Use of Fiscal Policy 1. When the economy is in a slump ( recession or depression ) the economy has contracted.  The government will enact an Expansionary Fiscal Policy to help boost the economy.

Government Use of Fiscal Policy 2. When the economy has picked up the pace ( an economic boom ) the economy has expanded.  The government will enact an Contractionary fiscal policy to help slow down the economy.

Difficulty in Calculating Effects  Remember the multiplier effect.  It is difficult to judge how large of an expansion or contraction a change in any single fiscal policy (taxes, transfer payments, etc) will produce in the economy

Sum it up... Economy is in a recession or depression Expansionary Fiscal Policy Economy is in a boom Contractionary Fiscal Policy

Two Categories of Fiscal Policy: 1) Discretionary fiscal policy- requires congressional action 2) Automatic Stabilizers- usually the results of these actions in the future (unemployment insurance)