1. How The Government’s FISCAL POLICY Affects the Economy
Objectives 7.16
How
The Government’s
FISCAL POLICY
Affects the Economy

2. Fiscal Policy The way the gov’t: Taxes citizens Spends tax money
Borrows money from
the Federal Reserve

3. How does changes in fiscal policy effect the economy??

4. fiscal policy
When the gov’t changes the amount it taxes, spends or borrows money, they are trying to speed up or slow down the economy

5. Gives the government the right to collect income tax
Sixteenth Amendment
Gives the government the right to collect income tax
Income = $$ citizens make
for working

6. When citizens get a pay check,
Sixteenth Amendment
Income Tax
When citizens get a pay check,
the government
automatically takes
the income tax

7. Sixteenth Amendment Income Tax The gov’t spends tax money
to pay for public
goods & services
Schools, roads, parks, postal, military defense

8. Changes in the amount of taxes collected…
Effects the amount of money consumers/ businesses have to spend

9. Effects of Government Taxes on the Economy

10. A Government tax increase
Takes money out of the economy
Decreases business/
consumer spending
(they have less money to spend)
Increases the amount of money that the government can spend

11. A government tax decrease
Puts money into the economy
Increase consumer/business spending (more money to spend)
Decreases the amount of money
the government can spend

12. Effects of Government Spending on the Economy

13. There are times when the government must spend money on Public goods & services

14. An increase in government spending
Puts more money into the economy
More business production
More need for workers
Workers hired
Higher taxes

15. An decrease in government spending
Takes money out of the economy
Slows business production
Less need for workers
Employees lose jobs
Lower taxes

16. Effects of Government Borrowing on the Economy

17. When the government wants to spend without raising taxes, it borrows money from the
Federal Reserve
(The Gov’t’s bank)

18. Increased Government Borrowing
Reduces funds available to the public
Banks loan less money to private businesses

19. Decreased Government Borrowing
Increases funds available to private sector
Banks can loan more $ to private businesses

20. fiscal policy
Government can use different fiscal policies to encourage the business cycle to react

21. In a recession:
The government might lower taxes or spend more money to put money in the circular flow

22. During inflation:
The government might raise taxes to take money out of the circular flow

24. The Business Cycle & Causes and effects of inflation and recession
Objective 7.18
The Business Cycle &
Causes and effects of inflation
and recession
scary words

25. The Business Cycle- A model to show periods of economic growth and decline
Inflation
Strong Economic
growth
Economic growth slows
Economy grows
Economy declines
Recession

26. Def: A rise in the prices of goods and services
Inflation
Def:
A rise in the prices of
goods and services

27. Causes of inflation Economy grows Production increase, more jobs
more people have/spend $
more $ is spent buying G/S

28. Demand for G/S increases
RESULTS OF INFLATION
Demand for G/S increases
Prices of G/S
increase

29. Prices increase, wages stay the same
RESULTS OF INFLATION
Prices increase, wages stay the same
Prices become unaffordable

30. RESULTS OF INFLATION
MONEY
LOSES
VALUE
Your money buys less

31. Monetary Policy to slow inflation:
FED sets Higher interest rates
decreases bank lending
Slows production
decreases consumer spending
decreases demand for g/s
(takes money out of flow)

32. Fiscal Policy to curb inflation:
Increase taxes
slows business spending
Slows consumer spending
(takes money out of flow)

33. Def: A decrease in the economic growth
Recession
Def:
A decrease in the economic growth

34. Causes of recession
As economy slows,
Demand decreases,
people stop spending $
less money is in circulation

35. Producers make fewer G/S
RESULTS OF Recession
Consumers Spend
less
Producers make fewer G/S

36. Producers make less profits,
RESULTS OF Recession
Producers make less profits,
Businesses
cannot afford to pay workers

37. Businesses cannot afford to pay workers
RESULTS OF Recession
Businesses cannot afford to pay workers
Workers lose jobs,
unemployment rises

38. Monetary Policy to stop recession:
FED sets lower interest rates
increases bank lending
increases production
increases consumer spending
increases demand for g/s
(puts money in flow)

39. Fiscal Policy to curb recession:
Decrease taxes
increases business spending
increases consumer spending
(puts $ into of flow)