1. SSEMA3-Explain how the government uses fiscal policy

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

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

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

5. Government Spending
Taxes
Fiscal Policy Tools

6. Fiscal Policy Expansionary Contractionary
Reduce Taxes Increase Government Spending
Increase
Taxes
Reduce
Government
Spending
Fiscal Policy

7. Expansionary Effects This is often used during a recession.
The intent is to:
1. boost Aggregate Demand and/or Supply
2. Increase GDP
3. Reduce Unemployment
Expansionary Effects

8. Contractionary Effects
This is often used during an expansion.
The intent is to:
1. Decrease Aggregate Demand or Supply
2. Decrease inflation
Contractionary Effects

9. Who Fiscal Policy Affects
Demand Side
Supply Side
To help households and increase AD
Usually in the form of tax breaks, spending in gov’t programs, and job creation
To help businesses and increase AS and create jobs
Usually through tax breaks and subsidies
Who Fiscal Policy Affects

10. Limitations Difficulty of changing spending levels
Predicting the future
Delayed results
Political pressures
Coordinating fiscal policy
Limitations

11. The idea that increased spending by consumers, businesses, or government becomes income for someone else.
Multiplier Effect

12. Fiscal Policy Theories
Classical Economics
Free markets regulate themselves
Very limited use of fiscal policy (laissez-faire)
Problem: How long can we afford to wait for an economy to return to market equilibrium?
Adam Smith
Fiscal Policy Theories

13. Fiscal Policy Theories
Keynesian Economics (Demand Side Economics)
Demands for goods drives the economy
Increase government spending to avoid recession
Decrease government spending to control inflation
Increase taxes to control inflation
Decrease taxes to boost the economy
Focuses on Aggregate Demand
John Maynard Keynes
Fiscal Policy Theories

14. Fiscal Policy Theories
Supply-side Economics
Supply of goods drives the economy
Tax cuts increase employment and total output
Less government intervention in the economy is better
Focuses on Aggregate Supply
Milton Friedman
Fiscal Policy Theories