1. Fiscal Policy

2. Government Economic Policies Government Economic Policies Fiscal Policy Monetary Policy Supply Side Microeconomic Policy

3. Fiscal Policy Fiscal Policy : Taxing and spending by the government to influence the level of economic activity Taxation Spending

4. Government Spending Expenditures by the government Governments spend money in the economy in a number of ways – Education – Health – Transfer payments – Army

5. Expansionary/ Loose Fiscal Policy Designed to boost economic growth by increasing injections into the economy The government can use expansionary fiscal policy in two ways – Increase Government Spending – Decrease Taxation

6. Increased Government Spending Governments should spend money to stimulate the economy. – Increased welfare spending Leads to households income to rise, consumption will increase as will firms output – Funding major projects like highways or hospitals Designed to provide a suitable environment for businesses to preform and grow. Leads to firms output increasing so investment spending rises e.g. Spending to improve Auckland’s traffic congestion, improved public transport – Increased spending on education designed to increase labour productivity. e.g. Subsidied work schemes and training – Funding more research and development New technology will arise, this will increased productivity

7. Taxation Any tax cut by the government will stimulate the economy. Direct tax cuts means consumers have more disposable income leading to an increase in consumption spending. - This could lead to inflationary pressures

8. Reduction in direct taxes Increased disposable incomes Increased demand for goods and services (consumption increases) AD AS ye PL AD’ PL’ y’ Increased production (Investment Increases) Increased demand for labour So output has gone up but so to have prices. If enough prices go up the we can expect employees to demand higher wages. Higher wages mean costs of production increases which will push supply to the left. Amount of goods and services produced in an economy increases (GDP increases, growth increases)

9. Expansionary Fiscal Policy and Growth Increased Government spending Decreased Taxation G C GDP =C +I +G +(X-M) AD = C + I + G +(X-M) AD increases from AD to AD’ Output increases from ye to Y’ Leads to increase in GDP Leads to increase in economic growth AD AS ye PL AD’ PL’ y’

10. Contractionary/ Tight Fiscal Policy The government can use contractionary fiscal policy in two ways – Decrease Government Spending – Increase Taxation – Contractionary fiscal policy will lead to the AD curve falling. – Thus will have the effect of reducing price level (inflation) and helps maintain price stability. However output will fall as a result.

11. Work Books Page 200 – Fiscal and Growth Page 197 – Fiscal and Price Stability

12. Contractionary Fiscal Policy Two ways the government can implement contractionary fiscal policy – Increased Taxation – Decreased Spending

13. Increased Company Taxation Output has fallen and prices have risen yet again. Stagflation= economy experiencing no growth while experiencing inflation Also risk a decrease in exports as NZ goods become relatively more expensive. AD AS Ye PL AS’ Y’ PL’

14. Governments Operating Balance Tax- leakage from circular flow Spending- injection into circular flow When tax=spending there is no increase in GDP in terms of G (Balanced Budget). Operating Balance is zero

15. Governments Operating Balance When tax > spending Govt. is running a budget surplus… called contractionary fiscal policy. When tax < spending… Govt. is running a budget deficit… called expansionary fiscal policy. Govt. uses expansionary fiscal policy when spending is down (demand) to keep growth in positives.

16. Fiscal Policy History of fiscal policies – Often used expansionary policies – 1930s govt acted to drag the economy out of depression – Think big projects of 1970s and 1980s meant to reduce NZ dependence on overseas oil and create 400,000 jobs. Pushed up govt spending and did not create as many jobs as hoped. Fiscal Responsibility Act 1994: aimed at running budget surpluses therefore CONTRACTIONARY in nature (enables debt to be paid off)

17. Activities Fiscal policy and inflation Work Book page 201-202 Fiscal Policy and Growth Workbooks page 208-209 Fiscal Policy and Unemployment Workbooks page 223- 224