Fiscal Policy SSEMA3 a-b

Purpose of Fiscal Policy  The use of government spending and revenue collection (taxes) to influence the economy.

Fiscal Policy Goals  Influence economic growth  Achieve full employment  Maintain price stability (control inflation)

Who controls it?  President Secretary of the Treasury the President’s chief economic advisor Congress

Fiscal Policy Tools  Government Spending  Taxes

Fiscal Policy Expansionary Reduce Taxes OR Increase Government Spending Contractionary Increase Taxes OR Reduce Government Spending

Expansionary Policies  Used during contractionary or recessionary phases  Government has two options  Decrease taxes  Increase spending

Expansionary Policies Decreasing Taxes  Gives people more money to spend  More money = more consumer demand  More demand = more production  More production = more jobs  More jobs = more demand Increase Spending  Increases demand for goods  More demand = more production  More production = more jobs  More jobs = more demand

Contractionary Policies  Used during a period of excessive inflation, or expansionary phase  Government has two options  Increase taxes  Decrease spending

Contractionary Policies Increase Taxes  People have less money to spend  Less money = less demand  Less demand = lower inflation Decrease Spending  Less money in the economy  Less money = less demand  Less demand = lower inflation

Limitations of Fiscal Policy  Difficulty of changing spending levels  Predicting the future  Delayed results  Political pressures  Coordinating fiscal policy

Problems with Fiscal Policy 1.Unpopular to raise taxes or cut government spending 2.If the government cuts taxes, they have less money to spend or they go into debt