Govern-ment
Fiscal Policy!!
Fiscal Policy – Changes in federal government spending or tax revenues designed to promote full employment, price stability, and reasonable rates of economic growth
Expansionary Fiscal Policy – An increase in government spending and/or a decrease in taxes designed to increase aggregate demand in the economy. The intent is to increase GDP and decrease unemployment
Contractionary Fiscal Policy – A decrease in government spending and/or an increase in taxes designed to decrease aggregate demand in the economy. The intent is to control inflation.
Multiplier Effects – Based in the idea that increased spending by consumers, businesses, or government becomes income for someone else. When this person spends the income, it becomes income for someone else, and so on, leading to increased production in an economy. Multiplier effects can also work in reverse when spending decreases
Supply-Side Fiscal Policy – The idea that fiscal policy may directly affect aggregate supply and not only aggregate demand. For example, a tax cut may give businesses incentives to expand or invest in capital goods, since they have more after-tax income to spend as they choose.
Expansionary fiscal policy
Contractionary fiscal policy – (AKA Restrictive)
Explain: What are the tools? How do they work? Why would the government use these?
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| |Govern-ment |Actions |Effects |on the |US |Economy |
| |Govern-ment Spending |Taxes |Interest Rates |Inflation |Un-employment |Economic Growth |
|Contract-ionary | | | | | | |
|Fiscal Policy | | | | | | |
|Expans-ionary | | | | | | |
|Fiscal Policy | | | | | | |
1. As a partnership, create three economic scenarios that involve recession, unemployment, and inflation. (1 each)
2. Exchange scenarios with another group and then analyze the scenarios adding any additional, necessary details.
3. Exchange scenarios with yet another group.
• Name the problem
• Choose the appropriate policy
• List the government action
Fiscal Policy is not the most effective choice to influence the business cycle.
For Homework: LIMITS OF FISCAL POLICY
* Make a list of why fiscal policies are difficult to put into
practice.
* For each, detail why it makes fiscal policy difficult.
Use pgs. 391-393
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