Fiscal Policy Fiscal Policy - Government effort to control the economy and maintain stable prices, full employment, and economic growth. Fiscal Policy deals with adjusting government spending (G) and tax revenue (T) in order to achieve these goals. IT is aimed at manipulating the federal budget. Macro Economics = Looking how the United States as a country deals with financial circumstances.

Fiscal Policy and Graphing Notes Three Macroeconomic Goals: 3-4% or less 5% or less -Economic 3-4 % or more

Inflation Too much money in the money supply The value of the dollar goes down Prices rise out of control “purchasing power” declines – you get less for your dollar Inflation usually goes up at a rate of 3% a year

Recession High Unemployment Low economic growth People are not spending / in turn little growth in businesses / little revenue forces businesses to fire employees!

Three Possible Results of Fiscal Policy Budget deficit (G>T) – ex. 4 trillion>3 trillion Budget surplus (G<T) –ex. 3 trillion<4 trillion Balanced Budget (G=T) –ex. 3 trillion=3 trillion

Two types of Fiscal Policy : Expansionary – used to fight recessions (problem #1) Contractionary - used to fight inflation (problem #2)

Expansionary Fiscal Policy T ____ & G ____ = AD ____ Lower Taxes and Raise Government Spending = What happens to the Aggregate Demand?

Contractionary Fiscal Policy T ____ & G ____ = AD _____ Raise taxes and lower Government Spending = What will happen to Aggregate Demand?

Recession - GRAPH IT! Output / Employment P/L1 A/D1 AS AD2 PL2 During Recession, Expansionary Fiscal Policy will Increase AD! O/E1O/E2

You Graph It! During Inflation, Contractionary Fiscal Policy will decrease AD!

Unemployment

3 Types of Unemployment #1. Frictional Unemployment “Temporarily unemployed” or being between jobs. Individuals are qualified workers with transferable skills but they aren’t working. Examples: High school or college graduates looking for jobs. Individuals that were fired and are looking for a better job. You’reFired! 12

Seasonal Unemployment This is a specific type of frictional unemployment which is due to time of year and the nature of the job. These jobs will come back Examples: Professional Santa Clause Impersonators Construction workers in Michigan 13 3 Types of Unemployment

#2. Structural Unemployment Changes in the structure of the labor force make some skills obsolete. Workers DO NOT have transferable skills and these jobs will never come back. Workers must learn new skills to get a job. The permanent loss of these jobs is called “creative destruction.” (Why?) Examples: VCR repairmen Carriage makers 14 3 Types of Unemployment

Technological Unemployment Type of structural unemployment where automation and machinery replace workers causing unemployment Examples: Auto assemblers fired as robots take over production Producers of Capital Goods (tractors) fire assemblers 15 3 Types of Unemployment

#3 Cyclical Unemployment Unemployment that results from economic downturns (recessions). As demand for goods and services falls, demand for labor falls and workers are fired. Examples: Steel workers laid off during recessions. Restaurant owners fire waiters after months of poor sales due to recession. This sucks! 16 3 Types of Unemployment

3 types of Unemployment 1.Frictional Unemployment – the time needed for the employer to find a match and the right employee. 1A. Seasonal Unemployment 2. Structural Unemployment - Job seekers don’t have the skills needed by the employer. 3. Cyclical Unemployment- Out of work because of a recession.