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Government Policies DemandSide Policies Discretionary Policy Fiscal Policy Supply-Side Policies Automatic Stabilizers Monetary Policy Interventionist Market-Based Government Policies DemandSide Policies Discretionary Policy Fiscal Policy Supply-Side Policies Automatic Stabilizers Monetary Policy Interventionist Market-Based Fiscal Policy: Manipulations by a government of its own expenditures and taxes to influence the level of aggregate demand Business Cycle and Fiscal Policy The goal of fiscal policy is to minimize output gaps, thus reducing fluctuations in the business cycle. Business Cycle and Fiscal Policy Contractionary Contract. Contractionary Contractionary Expansionary Expansionary Expansionary The goal of fiscal policy is to minimize output gaps, thus reducing fluctuations in the business cycle. • Expansionary fiscal policy increases aggregate demand • Contractionary fiscal policy decreases aggregate demand Expansionary Fiscal Policy A government can try to eliminate a recessionary gap by: • Increasing government spending • Decreasing personal income taxes • Decreasing corporate income taxes What components of GDP would these tactics affect? How? Expansionary Fiscal Policy A government can try to eliminate a recessionary gap by: • Increasing government spending (+G) • Decreasing personal income taxes (+discretionary income => +C) • Decreasing corporate income taxes (+after-tax profit => +I) Draw a diagram showing how expansionary fiscal policy could help close a recessionary gap. Expansionary Fiscal Policy A government can try to eliminate a recessionary gap by: • Increasing government spending (+G) • Decreasing personal income taxes (+discretionary income => +C) • Decreasing corporate income taxes (+after-tax profit => +I) Recessionary Gap Contractionary Fiscal Policy A government can try to eliminate an inflationary gap by: • Decreasing government spending (-G) • Increasing personal income taxes (-discretionary income => -C) • Increasing corporate income taxes (- after-tax profit => -I) Draw a diagram showing how contractionary fiscal policy could help close an inflationary gap. Contractionary Fiscal Policy A government can try to eliminate an inflationary gap by: • Decreasing government spending (-G) • Increasing personal income taxes (-discretionary income => -C) • Increasing corporate income taxes (- after-tax profit => -I) Inflationary Gap
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