1. Fiscal Policy

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

3. 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.

4. 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.

5. 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.

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