1. Fiscal Policy

2. Fiscal Policy A government’s policy on taxes and spending
Increased government spending and/or lower tax rates help to fight recessions

3. Fiscal Policy
Concerns itself with how governments tax and spend. Many governments have opportunities to increase aggregate demand by making changes in fiscal policy.
Def: Changes governments make in spending or taxation in order to achieve a particular economic goal
2 types of Fiscal Policy: expansionary and contractionary

4. Expansionary Fiscal Policy and the Problem of Unemployment

5. High unemployment rate is the result of people not spending enough money in the economy
People spend more money, firms sell more goods, firms can hire more people to produce the goods thus leading to a lower unemployment rate
To reduce the unemployment rate, Congress should implement expansionary fiscal policy
Congress can create fiscal policy that increases government spending, lower taxes, or both.

6. Increase government spending
This means more money in the economy by spending more on health care, education, national defense, and many other programs.
Example
Suppose the current prices the government is spending is $1,800 billion, business is spending $1,200 billion, and consumers are spending $6,000 billion.
Total spending at current prices is $9,000 billion
If the government decides to increase spending by $200 billion, then total spending increases to $9,200 billion.

7. As a result of the increase in total spending, firms sell more goods
When firms start to sell more goods, they have to hire more workers to produce the additional goods. The unemployment rate goes down as a result of more people working.

8. Short-term consequence:
More money is circulating in the economy
Unemployment goes down
Long-term consequence:
Crowding out: the situation in which increases in government spending lead to reductions in private spending
Because the government is now spending money on something it wasn’t spending on before, the private sector is no longer spending money on it.

9. Contractionary Fiscal Policy and the Problem of Inflation
Inflation: an increase in the price level (total level of prices)
Inflation is the result of too much spending in the economy compared to the quantity of goods and services available for purchase

10. Economic Recessions & Monetary and Fiscal Policy

11. What is recession?
Defined as two consecutive quarters during which output falls and unemployment rises
Why are recessions bad?
High toll on human suffering
When output falls, firms need fewer workers
This leads to massive layoffs, leading to a significant increase in unemployment
Surplus in goods means wasted resources

12. Recessions take a long time to resolve
If the government takes no action to end a recession, the only way for the economy to return to producing at the full- employment output level is for prices to drop so that the economy’s equilibrium will also drop
This process is very slow, and as a result, the economy will often have high unemployment for a very long time unless the government gets involved

13. What you should be doing now
Fiscal policy homework
Final project
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