Fiscal Policy

Monetary Policy Quick review Policy used to manipulate the economy Determined by the Fed Tools used = Open Market Operations Discount Rate Reserve Requirement

Fiscal Policy Fiscal policy = Gov. Influencing the economy. Main tools = taxes and government spending. Executive branch = proposes Legislature = passes into law. Automatic stabilizer = existing laws allows changes. Example = current progressive income tax. Fiscal policy refers to the power of the government (federal, state, or local) to use government spending and taxation policy changes to influence economic activity. The two main tools of fiscal policy are changes in taxes and changes in government spending. Fiscal policy changes are usually proposed by the executive branch of government and incorporated into a bill which must be passed by the legislative branch into law. In some cases, existing laws can allow automatic fiscal policy changes without new legislation. A good example of an “automatic stabilizer” fiscal policy is the current federal progressive income tax system. In times of inflation, people’s wages rise causing their tax burden to rise, lowering consumer spending and price level. In times of recession, wages will fall and people will pay less in taxes, allowing them to spend some additional income.

Expansionary Fiscal Policy Recessions / depressions Government wants to expand the economy Create jobs Lower taxes Raise spending More disposable $$ Creates jobs Fiscal policy refers to the power of the government (federal, state, or local) to use government spending and taxation policy changes to influence economic activity. The two main tools of fiscal policy are changes in taxes and changes in government spending. Fiscal policy changes are usually proposed by the executive branch of government and incorporated into a bill which must be passed by the legislative branch into law. In some cases, existing laws can allow automatic fiscal policy changes without new legislation. A good example of an “automatic stabilizer” fiscal policy is the current federal progressive income tax system. In times of inflation, people’s wages rise causing their tax burden to rise, lowering consumer spending and price level. In times of recession, wages will fall and people will pay less in taxes, allowing them to spend some additional income.

Contractionary Fiscal Policy High inflation (boom) Government wants to shrink the economy Stabilize prices raise taxes lower spending less disposable $$ Pulls $$ out of economy Fiscal policy refers to the power of the government (federal, state, or local) to use government spending and taxation policy changes to influence economic activity. The two main tools of fiscal policy are changes in taxes and changes in government spending. Fiscal policy changes are usually proposed by the executive branch of government and incorporated into a bill which must be passed by the legislative branch into law. In some cases, existing laws can allow automatic fiscal policy changes without new legislation. A good example of an “automatic stabilizer” fiscal policy is the current federal progressive income tax system. In times of inflation, people’s wages rise causing their tax burden to rise, lowering consumer spending and price level. In times of recession, wages will fall and people will pay less in taxes, allowing them to spend some additional income.

Open market operations Monetary v Fiscal Monetary Fiscal Open market operations Yes Taxes Discount rate Reserve requirement Gov. Spending