How The Government’s FISCAL POLICY Affects the Economy Objectives 7.16 How The Government’s FISCAL POLICY Affects the Economy

Fiscal Policy The way the gov’t: Taxes citizens Spends tax money Borrows money from the Federal Reserve

How does changes in fiscal policy effect the economy??

fiscal policy When the gov’t changes the amount it taxes, spends or borrows money, they are trying to speed up or slow down the economy

Gives the government the right to collect income tax Sixteenth Amendment Gives the government the right to collect income tax Income = $$ citizens make for working

When citizens get a pay check, Sixteenth Amendment Income Tax When citizens get a pay check, the government automatically takes the income tax

Sixteenth Amendment Income Tax The gov’t spends tax money to pay for public goods & services Schools, roads, parks, postal, military defense

Changes in the amount of taxes collected… Effects the amount of money consumers/ businesses have to spend

Effects of Government Taxes on the Economy

A Government tax increase Takes money out of the economy Decreases business/ consumer spending (they have less money to spend) Increases the amount of money that the government can spend

A government tax decrease Puts money into the economy Increase consumer/business spending (more money to spend) Decreases the amount of money the government can spend

Effects of Government Spending on the Economy

There are times when the government must spend money on Public goods & services

An increase in government spending Puts more money into the economy More business production More need for workers Workers hired Higher taxes

An decrease in government spending Takes money out of the economy Slows business production Less need for workers Employees lose jobs Lower taxes

Effects of Government Borrowing on the Economy

When the government wants to spend without raising taxes, it borrows money from the Federal Reserve (The Gov’t’s bank)

Increased Government Borrowing Reduces funds available to the public Banks loan less money to private businesses

Decreased Government Borrowing Increases funds available to private sector Banks can loan more $ to private businesses

fiscal policy Government can use different fiscal policies to encourage the business cycle to react

In a recession: The government might lower taxes or spend more money to put money in the circular flow

During inflation: The government might raise taxes to take money out of the circular flow

The Business Cycle & Causes and effects of inflation and recession Objective 7.18 The Business Cycle & Causes and effects of inflation and recession scary words

The Business Cycle- A model to show periods of economic growth and decline Inflation Strong Economic growth Economic growth slows Economy grows Economy declines Recession

Def: A rise in the prices of goods and services Inflation Def: A rise in the prices of goods and services

Causes of inflation Economy grows Production increase, more jobs more people have/spend $ more $ is spent buying G/S

Demand for G/S increases RESULTS OF INFLATION Demand for G/S increases Prices of G/S increase

Prices increase, wages stay the same RESULTS OF INFLATION Prices increase, wages stay the same Prices become unaffordable

RESULTS OF INFLATION MONEY LOSES VALUE Your money buys less

Monetary Policy to slow inflation: FED sets Higher interest rates decreases bank lending Slows production decreases consumer spending decreases demand for g/s (takes money out of flow)

Fiscal Policy to curb inflation: Increase taxes slows business spending Slows consumer spending (takes money out of flow)

Def: A decrease in the economic growth Recession Def: A decrease in the economic growth

Causes of recession As economy slows, Demand decreases, people stop spending $ less money is in circulation

Producers make fewer G/S RESULTS OF Recession Consumers Spend less Producers make fewer G/S

Producers make less profits, RESULTS OF Recession Producers make less profits, Businesses cannot afford to pay workers

Businesses cannot afford to pay workers RESULTS OF Recession Businesses cannot afford to pay workers Workers lose jobs, unemployment rises

Monetary Policy to stop recession: FED sets lower interest rates increases bank lending increases production increases consumer spending increases demand for g/s (puts money in flow)

Fiscal Policy to curb recession: Decrease taxes increases business spending increases consumer spending (puts $ into of flow)