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

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Presentation transcript:

Fiscal Policy

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

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

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

Fiscal Policy Tools Government Spending Taxes

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

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

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 Keynesian Economics (Demand Side Economics) Demand for goods drives the economy Use of Government Spending as the main tool to control inflation and 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 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