1. Fiscal Policy © Robin Foster

2. Mechanics of Fiscal Policy- Discretionary Policy
AP Macro

3. Fiscal Policy Government Spending==This means Congress .
This is the use of either government purchases of goods and services or tax policy to stabilize the economy
This is the “G” in the calculation of the GDP

4. Fiscal Policy
Government efforts to promote full employment and price stability by changing government spending (G) and/or taxes (T).
Recession is countered with expansionary policy.
Increase government spending (G )
Decrease taxes (T )
Inflation is countered with contractionary policy
Decrease government spending (G )
Increase Taxes (T )    

5. Fiscal Policy In a recession—expansionary fiscal policy to Increase AD
In a period of inflation— contractionary fiscal policy to Decrease AD

6. How does Fiscal Policy work?
Recession
Inflation
Increase GS to Increase AD
Decrease taxes to Increase DI to increase AD.
Increasing GS and decreasing T….side effect increasing national debt.
Decrease GS to decrease AD
Increase taxes to decrease DI to decrease AD
Decreasing GS and increasing taxes….side effect, either a budget surplus…..this means idle debt or pay off debt

7. Expansionary Fiscal Policy
SRAS
LRAS PL  P1  P
AD1 AD  Y YF
GDPR
IF RECESSION, THEN G↑.: AD  .: GDPR↑ & PL↑ .: u%↓ & π% ↑
OR T↓ .: DI↑ .: C↑.: AD  .: GDPR↑ & PL↑ .: u%↓ & π% ↑

8. Contractionary Fiscal Policy
LRAS PL
SRAS  P  P1 AD
AD1  YF Y
GDPR
IF INFLATION, THEN G↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
OR T↑ .: DI↓ .: C↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓

9. Discretionary v. Automatic Fiscal Policies
Increasing or Decreasing Government Spending and/or Taxes in order to return the economy to full employment. Discretionary policy involves policy makers doing fiscal policy in response to an economic problem
Automatic
Unemployment compensation & marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation. Automatic fiscal policy takes place without policy makers having to respond to current economic problems.

10. Weaknesses of Fiscal Policy
Lags
Inside lag – it takes time to recognize economic problems and to promote solutions to those problems
Outside lag – it takes time to implement solutions to problems
Political Motivation
Politicians face re-election and are more likely to support expansionary rather than contractionary fiscal policy.
Increased government spending and decreased taxes are almost always more popular with voters than increased taxes and decreased spending.

11. Government Lags Recognition-Aware a recession is happening?
Administrative-democracy is slow to move.
Operational-time between actual and efforts occur with output, employment or price level.
Political business cycle-fiscal policy is political, election years, etc.

12. Automatic Stabilizers-Non-Discretionary Policy
Support the economy during recessions
Help economy from becoming overheated during inflationary periods
Example: tax revenues fall as GDP falls during a recession, this prevents consumption preventing the economy from falling further.
Transfer payments are automatic stabilizers: unemployment, food stamps, etc.