1. Fiscal Policy Government actions and decisions to influence the economy Reference 15.1

2. Fiscal Policy Government Action (Executive, Legislative) (not monetary policy conducted by FRB) Expansionary: Increase total spending to reduce unemployment Contractionary: Reduce total spending to reduce inflation

3. Expansionary Fiscal Policy ? When might the government employ Expansionary Fiscal Policy ? During recessions During periods of high unemployment Maybe just before the next election “It’s the economy, Stupid”

4. Expansionary Fiscal Policy The government can decide to: 1.Increase government spending (jobs) 2.Lower taxes (increase aggregate demand) 3.Do both Will this policy achieve its goal???? Will this policy achieve its goal????

5. maybe… Many variables “crowd out”Will additional government spending “crowd out” private spending? Crowding-outCrowding-out Example: An additional $2,000,000 dollars spent on education by government may result in consumers spending $2,000,000 less on private school tuition.

6. The General Theory of Employment, Interest, and Money John Maynard Keynes The General Theory of Employment, Interest, and Money 1883-1946 Revolutionizes thinking about the government’s role in the economy. – Influential to the “New Deal” Argued for expansionary fiscal policy in times of recession or depression

7. Increasing government spending will spur the economy to create more jobs

8. Contractionary Fiscal Policy The government can decide to: 1.Reduce government spending 2.Increase taxes 3.Do both NOT VERY POPULAR…But will it work?

9. maybe… Will private spending “crowd in”? Will consumers spend more when faced with less government spending? Crowding-inCrowding-in Example: The schools are so under-funded that parents spend money to put their kids in private schools.

10. How Taxes Can Affect Spending After-tax incomeAfter-tax income: what you have left to spend after you’ve paid income taxes. Higher after-tax income increases demand (expansionary) low tax rate Lower after-tax income decreases demand (contractionary) high tax rate

12. Marginal Tax Rates

14. Current Issue: How will the repeal of the Bush tax cuts affect the economy?

15. How Taxes Can Affect Supply If you were taxed at 100%, would you work? High tax rates can reduce productivityHigh tax rates can reduce productivity

16. Tax Rates ….Tax Revenues Will higher tax rates give the government greater tax revenues? Will lower tax rates give the government smaller tax revenues? Only if INCOME is constant.

17. Laffer Curve controversial theory created by economist Arthur Laffer represents the relationship between tax rates and tax revenues. What is the ideal tax rate?What is the ideal tax rate?

20. Review What is expansionary fiscal policy, and for what purpose is it likely to be implemented? What is contractionary fiscal policy, and for what purpose is it likely to be implemented?

21. Review Is expansionary fiscal policy always effective at increasing total spending and decreasing unemployment? Explain your answer.

22. Review Someone says, “If the federal government cut income tax rates, tax revenues will fall.” Might this person be wrong? Explain your answer.

23. Class/Homework: 16.2 Budget: Deficits and Surpluses –Read and note –Complete Section Review #1-5

24. Homework Read and note Ch. 16.1 “Taxes” pages 418-430. Complete Section Review p. 430 #2-4