1. Fiscal Policy
UNIT 6
Chapter 15

2. What is fiscal policy?
Fiscal – refers to anything having to do with gov’t revenue, spending and debt.
Fiscal policy – how the government uses taxes and gov’t spending to affect the economy and keep it stable.
Used to FIGHT INFLATION or INCREASE AGGREGATE DEMAND

3. Automatic Stabilizers – automatically stabilize the economy.
Types of Fiscal Policy
The total level of government spending can be changed to help increase or decrease the output of the economy.
Discretionary Fiscal Policy – the government can choose different taxing and spending methods to regulate the economy. (Requires legislation)
Automatic Stabilizers – automatically stabilize the economy.
Public transfer payments – entitlements
Progressive income taxes – work to keep increased income from entering the economy.

4. Expansionary vs. Contractionary
Fiscal Policy
The government has two tools to
work with…
Taxes
Spending
Expansionary vs. Contractionary
Fiscal Policy
Used to increase the level
of AD in weak economy.
Used to decrease the level
of AD in an economy growing too
quickly.

5. Expansionary Fiscal Policy
Works to increase AD
Causes price level to rise
Firms have incentive to produce more
Unemployment falls
DECREASE TAXES
INCREASE GOV’T SPENDING
SOME COMBINATION

6. Expansionary Policy

7. Contractionary Fiscal Policy
Decrease AD
In these cases AD can be > AS which leads to increasing price level
Weakens the purchasing power of the dollar
INCREASE TAXES
DECREASE SPENDING
COMBINATION

8. Contractionary Policy

9. LIMITATIONS OF FISCAL POLICY
LAG
COORDINATION WITH THE BUSINESS CYCLE
RATIONAL EXPECTATIONS THEORY
GEOGRAPHY

10. DEMAND-SIDE ECONOMICS
Historically economists believed the gov’t should stay out of the economy
Great Depression changed this
Keynesian Economics –
Keynes is responsible for GDP=C+I+G+F
Focused on the Investment part
Spending Multiplier Effect
Keynes is “father” of Macroeconomics

11. Supply-Side Economics
Provide incentives to producers to increase AS
Cut production costs to encourage producers to supply more
Lower taxes
Spending cuts
Decreased regulation
REAGONOMICS – “TRICKLE DOWN”

12. Reaganomics vs. Obamanomics

13. Laffer Curve

15. Federal Deficit and Debt

16. Federal Spending Balanced Budget Budget Surplus Budget Deficit
Refers to 1 year

17. Causes of Budget Deficits
National Emergencies
Public Goods and Services
Fiscal Policies
Entitlements

18. How does the gov’t raise money for deficit spending?
Savings Bonds
T-Bills
Treasury Notes
Treasury Bonds

19. National Debt Money owed to holders of these bonds plus interest
Money borrowed from trust funds – SS, Medicare, Medicaid (although some don’t see this as actual debt)

20. National Debt

21. Attempting to Control the Deficit and Debt