Fiscal Policy Notes A Review of Reading IP

Fiscal Policy Key Concepts What does fiscal mean? Government spending, debt, revenue 2. Define fiscal policy Federal government using Government Spending Taxation to affect the economy

Fiscal Policy Key Concepts 3. What are the two goals of FP? A) Increase aggregate demand B) Fight inflation

Challenge Question!!! What institution is responsible for fiscal policy? The Federal Reserve The Government Commercial Banks Economic Advisory Organizations

Expansionary vs. Contractionary Make larger Contractionary Make smaller/tighter

$$$ $$$ Expansionary FP Expansionary= expand the amount of money in the economy 4. When will the economy use expansionary FP? When the economy slows (recession) What is expansionary FP’s plan? Plan to expand the amount of $ in the economy This will increase aggregate demand Increased spending will stimulate the economy $$$ $$$

Contractionary FP Contractionary= reduce the amount of money in the economy 5. When will the economy use contractionary FP? During Inflation What is contractionary FP’s plan? Plan to reduce the amount of $ in the economy This will decrease aggregate demand Decreased spending will stop prices from getting too high $ $

Challenge Question!! True or False: In a recession, it is a good idea to contract the amount of money in the economy.

Discretionary FP 6. What is discretionary FP? Actions taken by the government by choice to correct economic instability 7. What type of active government responses might be used in discretionary FP? A) Changing taxes B) Changing government spending

Automatic Stabilizers 8. What are automatic stabilizers? Features of fiscal policy that automatically stabilize the economy (such as public transfer payments) 9. What are examples of public transfer payments? Unemployment compensation, food stamps

Automatic Stabilizers 10. How do public transfer payments stabilize the economy in a recession? More people qualify for government benefits like food stamps in a recession. They get more money to spend from the government This increases aggregate demand and helps the economy 11. How do public transfer payments stabilize the economy when it is growing too fast (inflationary period)? Economy is doing well so less people qualify for benefits like food stamps This takes $ out of the economy, which reduces aggregate demand, and keeps prices from rising

Automatic Stabilizers 12. How do progressive income taxes act as automatic stabilizers during prosperous times? More people get paid, the more taxes they pay. Taxes prevent some of this increased income from entering the economy, which keeps inflation in check. 13. How do progressive income taxes act as automatic stabilizers during a recession People make less, taxes less, reduced impact of recession

Challenge Question!!! True or False: Automatic stabilizers are part of discretionary fiscal policy.

The Purpose of Fiscal Policy 14. What is expansionary fiscal policy designed to do? Stimulate a weak economy to grow 15. What is contractionary fiscal policy designed to do? Slow the economy down to control inflation

Policy 1: Expansionary Fiscal Policy 16. In expansionary fiscal policy, does the government want to increase or decrease aggregate demand? Increase AD 17. Expansionary FP ____________ government spending and ______________ taxes increases decreases

Expansionary Fiscal Policy 18. What example of increased government spending does the book use? Increased highway spending (build more roads) 19. What taxes might be lowered in expansionary fiscal policy? Why? Income and corporate taxes. So people will spend more and increase aggregate demand. $$

Policy 2: Contractionary Fiscal Policy 20. In contractionary FP, does the government want to increase or decrease aggregate demand? Decrease AD

Contractionary Fiscal Policy 21. What is it called when the economy is growing too rapidly and aggregate demand is increasing faster than supply? Demand-pull inflation 22. Contractionary FP ____________ government spending and ______________ taxes 23. What example does the book give of cuts in government spending? Cuts in highway construction, education, healthcare decreases increases

Challenge Question Which of the following is correct? A) Expansionary FP such as decreased government spending is used in periods of inflation B) Expansionary FP such as tax cuts are used in periods of recession C) Contractionary FP such as tax cuts are used in periods of recession D) Contractionary FP such as increased government spending is used in periods of recession

Limitations of FP- Policy Lags 24. Describe the limitations of fiscal policy related to policy lags. Lags behind economic issues. Takes congress months to decide on a course of action.

Limitations of FP- Political Issues 25. Describe the limitations of fiscal policy related to political issues. The President may not follow the advice of the Council of Economics advisors due to political issues (like reelection). Challenge Questions!!!! Despite what economic advisors say, would a president who is up for reelection be more inclined to increase taxes or cut taxes?   2. Expansionary fiscal policy involves the use of increased government spending to change economic conditions. In general, do you think democrats or republicans would be more supportive of this type of policy? 3. Contractionary fiscal policy involves the use of decreased government spending to change the economy. In general, do you think democrats or republicans would be more supportive of this type of policy?     Cut taxes Democrats Republicans