Fiscal Policy Strategies Warm Up Warm Up: Who carries out Fiscal Policy and what are their tools?

Fiscal Policy Strategies Supply Side Economics—focuses on achieving economic stability and growth by increasing the supply of goods and services throughout the economy. –Governments role limited –Increased government incentives for business; encourages hiring of workers –Leads to lower unemployment rate –These workers then buy more goods/services

Elements of Supply Side Economics Supply side economists believe: –Government adopt laissez-faire approach –Favor tax cuts to stimulate the economy –Policy helps create new businesses –This increases tax revenues –Reduce government regulations –Reduced regulations, lower business costs

Demand Side Demand Side Economics Keynesian Demand side economics—focuses on achieving economic growth through the government’s influence on aggregate demand. –Increasing aggregate demand through market forces was not enough. –Government involvement was necessary in order to achieve full employment and improve sluggish business activity.

Expansionary and Contractionary fiscal policy Expansionary fiscal policy - increase in government expenditures and/or a decrease in taxes. –that causes budget deficit to increase or its budget surplus to decrease. Contractionary fiscal policy - decrease in government expenditures and/or an increase in taxes. –that causes budget deficit to decrease or its budget surplus to increase.

Limitations of Fiscal Policy 1. Timing Problems—In order to be effective, policies like medicine, must be taken at the proper time and in the proper doses. –Forecasting is an inexact science –There are time lags from when a policy is implemented until results are seen.

Limitations of Fiscal Policy Political Pressures—Elected officials are afraid of being voted out of office which affects their judgments. Restrictive Fiscal Policy—Increases taxes and reduces government spending. Expansionary Fiscal Policy—Decreases taxes, increases gov’t spending, and usually popular with the people. Unpredictable Economic Behaviors—People don’t always respond the way that economists think that they will.

Limitations of Fiscal Policy Lack of Coordination—Fiscal policy needs to be coordinated with monetary policy. –The federal, state, and local governments have to coordinate their policies.(taxation and spending policies). –The Fed and Congress often have different ideas about what to do.