Fiscal Policy.

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Chapter 12: Fiscal Policy (G).

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Fiscal Policy

The use of government spending and revenue collection (taxes) to influence the economy. Purpose

Fiscal Policy Goals Influence economic growth Achieve full employment Maintain price stability (control inflation) Fiscal Policy Goals

Secretary of the Treasury the President’s chief economic advisor Congress Who controls it?

Government Spending Taxes Fiscal Policy Tools

Discretionary vs Automatic Fiscal Policy Deliberate Increasing or Decreasing of Government Spending and/or Taxes in order to return the economy to full employment in response to an economic problem Built in government stabilizers such as unemployment compensation & marginal tax rates that help mitigate the effects of recession and inflation. Takes place without policy makers having to respond to current economic problems Discretionary vs Automatic Fiscal Policy

Discretionary Fiscal Policy Expansionary Contractionary Reduce Taxes Increase Government Spending Increase Taxes Reduce Government Spending Discretionary Fiscal Policy

Limitations Difficulty of changing spending levels Predicting the future Delayed results Political pressures Coordinating fiscal policy Limitations

Fiscal Policy Theories Classical Economics Free markets regulate themselves Very limited use of fiscal policy (laissez-faire) Problem: How long can we afford to wait for an economy to return to market equilibrium? Adam Smith Fiscal Policy Theories

Fiscal Policy Theories Keynesian Economics (Demand Side Economics) Demand for goods drives the economy Use of Government Spending as the main tool boost GDP in times of recession Increase taxes (mainly corporate) to control inflation and pay for increased spending Increased legislation to protect consumers Focuses on Aggregate Demand John Maynard Keynes Fiscal Policy Theories

Fiscal Policy Theories Supply-side Economics Supply of goods drives the economy Tax cuts increase employment and total output Less government intervention in the economy is better Focuses on Aggregate Supply Milton Friedman Fiscal Policy Theories