1. What is Fiscal Policy
Unit 15.1

2. Fiscal Policy Tools
Fiscal Policy are the collective actions of government to collect and spend money.
Expansionary Fiscal Policy
Grow economy and increase employment
Contractionary Fiscal Policy
Combat Inflation
Discretionary Fiscal Policy
Automatic Stabilizers
Public Transfer Payments
Progressive Income Taxes

3. Expansionary and Contractionary Fiscal Policies
Expansionary Fiscal Policies are intended to expand the economy, by reducing taxes, and/or increasing government spending.
Contractionary Fiscal Policies are intended to contract the economy, by increasing taxes, or reducing government spending.

4. Limitations of Fiscal Policy
Policy Lags
Time to get through Congress
Timing Issues
Business Cycle
Rational Expectations Theory
You don’t always get what you want
Political Issues
Council of Economic Advisors
Regional Issues

5. By lowering taxes, the government can increase either demand,
Expansionary policies are intended to grow the economy and increase output. This reduces unemployment, but also raises the risk of inflation. $
Output (GDP)
Aggregate
Demand 1
Supply
Demand 2
Increasing
Demand
Supply 1
Supply 2
By lowering taxes, the government can increase either demand,
or supply. Also, the government can directly increase demand
by doing the buying itself, or supply, by providing direct services. For example, the government lowers taxes to families, which increases domestic spending, which increases demand.

6. A contractionary policy is intended to slow economic growth, to prevent inflation. The unintended result can be stalling the economy or creating a recession. Contractionary policy also increases unemployment. $
Output (GDP)
Aggregate
Demand 1
Supply
Demand 2
Decreasing
Demand
Supply 1
Supply 2
By increasing taxes or reducing spending, the government can decrease demand or supply. For example, if the government raises taxes on businesses, this will make it more costly to produce goods, and they will produce fewer goods, or raise the price of their goods.