Download Fiscal Policy

Fiscal Policy
What is Fiscal Policy?
What is Fiscal Policy Used For?
What is Fiscal Policy?
• Changes in government spending and tax
collections to achieve:
1. full employment,
2. control inflation, and
3. encourage economic growth.
Fiscal Policy Video
Fiscal Policy and the AD/AS Model
• Discretionary (active) Fiscal Policy: Changes in
Government Spending and Taxes are
dependent on the Federal Government.
• Non-Discretionary (passive/automatic):
Changes are not initiated through the
government.
Options to Increase AD:
Expansionary Fiscal Policy
• Expansionary fiscal policy: helps an economy
out of recession and to reduce
unemployment.
1. Increase government spending (the most
direct method).
2. Reduce Taxes.
3. Combination of both to achieve greater
effects.
Reduce Taxes or Increase G Spending
to Solve the Recessionary Gap
Why Does the Government Not Always
Select Expansionary Policies?
• Expansionary Fiscal Policy can create budget
deficits (Government Spending > Tax
Revenues).
• Chronic budget deficits can result in large
debts levels, high interest rates, inflation, and
economic collapse… The Greek Example.
• If the government does not use expansionary
fiscal policy. AS will adjust but it takes longer.
Contractionary Fiscal Policy:
Used to “Cool” the Economy
• Reduces demand-pull inflation (when demand
shifts out and the price level increase), it is
applied when the economy is experiencing
over-employment).
• It is designed to deal with inflation.
• Why do we need to control inflation?
How do we Engage in
Contractionary Fiscal Policy?
Decrease government spending
Increase tax
Combination of both to achieve
greater effects
Increase Taxes or Reduce G Spending
to Solve the Inflationary Gap
What is the Best Policy Option?
To change taxes or to change spending?
• Economists who support government
expansion / size believe in increased
government spending during recessions and
tax increases to curb inflation.
• Economists who want to reduce or limit the
size of government believe in tax cuts during
recessions and reduced spending to curb
inflation.
Test and Exam Preparation
• Questions 1 and 2, Page 275.
• In particular, it is important for you to read up
on the “balanced budget multiplier” from the
end of chapter eight.
Built-In Stability / Stabilization
What Happens as GDP Changes?
Automatic / Built-in
Economic Stabilizers
• Fiscal policy is also automatic, rather than
discretionary.
• It does not always require the government to
convene and create expansionary or
contractionary plans.
• This is because taxes collected decline as GDP
falls, since most are income/consumption
taxes & government spending/transfers rise.
Different Taxation Policies:
The More Progressive, the More Stability
Progressive Taxes
($ up, Taxes up)
(GDP up, Avg Tax up)
Proportional Taxes
(Tax same % for all
people)
(GDP up, Avg Tax same)
Regressive Taxes
($ up, Taxes down)
(GDP up, Avg Tax down)
Progressive Taxes.
How Much Would I pay in Ontario?
Employment Income
Taxes Owed
20 000
1 912 (9.6%)
40 000
5 962 (14.9%)
60 000
12 002 (20%)
80 000
18 486 (23.1%)
100 000
26 913 (26.9%)
500 000
211 579 (42.3%)
Test and Examination Preparation
• Page 275 # 4