Methods of Fiscal Policy Taxing and Spending

I. Review: Monetary Policy Monetary Policy = Actions by the FED to increase or decrease the money supply to fight inflation, recession, or stagflation.

II. What is fiscal policy? Fiscal Policy = Actions by Congress to increase or decrease aggregate demand to fight inflation, recession, or stagflation.

III. What exactly is aggregate demand? - Aggregate demand just means “total” demand. - Aggregate demand just means “total” demand. A. It is the total amount of goods and services that everyone in America wants to buy. B. With fiscal policy, Congress can actually increase or decrease the amount of stuff that we want to purchase. C. When Congress increases aggregate demand, it increases the amount of stuff that we want to buy. D. When Congress decreases aggregate demand, it decreases the amount of stuff that we want to buy.

IV. But when should Congress increase or decrease aggregate demand? A. Congress should treat aggregate demand just like the Fed treats the money supply to fight recession, high inflation, or stagflation. B. You know that when the economy has slowed down and we are in a recession, the Fed should… increase or decrease the money supply? Increase C. But that’s the Fed and monetary policy. This is Congress and fiscal policy. 1. When we are in a recession, do you think that Congress should increase aggregate demand and send people shopping to kill the recession, or decrease aggregate demand and keep people from shopping to kill the recession? Increase or decrease aggregate demand?

IV. But when should Congress increase or decrease aggregate demand? Increase a. Increasing aggregate demand means that more people will want to buy more things. b. So businesses will make more things for them to buy, so GDP will increase or decrease? Increase c. And since we are making more and more stuff for people to buy, more people need to be hired to make this stuff. So the unemployment rate will go… down. d. So increasing aggregate demand during a recession will increase GDP and decrease the unemployment rate, killing the recession.

IV. But when should Congress increase or decrease aggregate demand? 2. So, when we are in a recession… a. The Fed should increase the money supply to kill the recession. b. Congress should increase aggregate demand to kill the recession. c. The Fed increasing the money suppy is called “expansionary monetary policy.” d. Congress increasing demand is called “expansionary fiscal policy.”

IV. But when should Congress increase or decrease aggregate demand? D. Now let’s talk about high inflation 1. You know that when the economy is moving too fast and we are experiencing high inflation, the Fed should… increase or decrease the money supply Decrease 2. That’s the Fed and monetary policy. E. Now for Congress and fiscal policy. 1. When we are experiencing high inflation, do you think that Congress should increase aggregate demand and send people shopping to kill the high inflation, or decrease aggregate demand and keep people from shopping to kill the high inflation? Increase or decrease aggregate demand?

IV. But when should Congress increase or decrease aggregate demand? Decrease a. Decreasing aggregate demand means that fewer people will buy things. b. If fewer people are buying things, will sellers keep on raising their prices? No c. So, by decreasing aggregate demand, Congress kills the high inflation.

IV. But when should Congress increase or decrease aggregate demand? 2. So, when we are experiencing high inflation: a. The Fed should decrease the money supply to kill the high inflation b. Congress should decrease aggregate demand to kill the high inflation. c. The Fed decreasing the money suppy is called “contractionary monetary policy.” d. Congress decreasing demand is called “contractionary fiscal policy.” e. But how does Congress increase or decrease aggregate demand? f. How can Congress make us want to buy more or fewer things?

V. The Methods of Fiscal Policy - Two ways that Congress can increase or decrease aggregate demand: A. Congress can Increase or Decrease Government Spending. A. Congress can Increase or Decrease Government Spending. B. Congress can Raise or Lower Taxes. B. Congress can Raise or Lower Taxes.

V. The Methods of Fiscal Policy C. Increasing government spending (National Defense, Education, Highways) C. Increasing government spending (National Defense, Education, Highways)  more people being hired  more people/businesses having more money to spend  increased aggregate demand This would be expansionary fiscal policy This would be expansionary fiscal policy This will kill a recession This will kill a recession D. Decreasing government spending D. Decreasing government spending  fewer people being hired for government work or people being laid off  people having less money to spend  decreased aggregate demand This would be contractionary fiscal policy This would be contractionary fiscal policy This will kill high inflation. This will kill high inflation.

V. The Methods of Fiscal Policy E. Cutting taxes E. Cutting taxes  people have more money to spend  people have more money to spend  increased aggregate demand  increased aggregate demand This would be expansionary fiscal policy This would be expansionary fiscal policy This will kill a recession This will kill a recession F. Raising taxes F. Raising taxes  people have less money to spend  people have less money to spend  decreased aggregate demand  decreased aggregate demand This would be contractionary fiscal policy This would be contractionary fiscal policy This will kill high inflation. This will kill high inflation.

V. The Methods of Fiscal Policy G. What about stagflation? Recession and high inflation together? 1. We should treat it just like… High inflation 2. We would use contractionary fiscal policy to fight stagflation.

VI. What might Congress consider before they act? A. National Budget Deficit: A. National Budget Deficit: 1. The budget deficit is when the government spends more than it receives in revenue in a given fiscal year (FY) 2. In FY 2013 the deficit was $680 billion.

What might Congress consider before they act? B. National Debt: 1. All of the past budget deficits added up. 2. How does the government spend more money than it takes in? 2. How does the government spend more money than it takes in? We borrow the money by selling securities like Treasury bills, notes, bonds and savings bonds to the public We borrow the money by selling securities like Treasury bills, notes, bonds and savings bonds to the public 3. So how much is it? 3. So how much is it?