Download Fiscal Policy - Mr. Catalano

Fiscal Policy:
Understanding Uncle Sam’s Tool
Box
How can
policymakers
influence the
economy?
FISCAL POLICY:
The use of taxation
and government
spending to control
the economy!!!
Consider this situation:
• Output (GDP) is down
• Many people are getting laid off from their jobs
• People have less discretionary income, so
aggregate demand (spending) is down
• Businesses continue to suffer and are forced
to lay off more and more workers
WHAT SHOULD THE
GOVERNMENT DO?
Encourage Economic
Growth!
Increase aggregate demand!!!
Prices will rise
Suppliers will want to produce more
People will get hired back to their jobs
People will feel comfortable spending
money again
The economy will expand 
We call this…
EXPANSIONARY FISCAL POLICY
Tool #1:
Tool #2:
INCREASE
GOVERNMENT
SPENDING
CUT
TAXES

Government buys more goods & services


Companies that sell goods to the government
earn profits, which they use to pay their
workers more & hire new workers
When tax rates go down, individuals have
more money to spend and businesses keep
more of their profits

Workers have more money & spend more in
shops & restaurants
Consumers now have more money to spend
on goods and services

Shops & restaurants buy more goods and hire
more workers to meet their needs
Businesses now have more money to spend
on land, labor and capital

These actions will increase demand, prices,
and output



In the short term, government spending leads
to more jobs and more output
Now, consider this situation:
• Fast-growing demand is exceeding supply
• Producers who cannot increase output levels
are forced to increase their prices
• Inflation occurs, cutting into consumers’
purchasing power & discouraging economic
growth and stability
WHAT SHOULD THE
GOVERNMENT DO?
Slow Down Economic
Growth!
Decrease demand!!!
Keep prices low
Suppliers will cut production/lay off workers
Lower production will slow the rate
of growth of the economy
Inflation will not occur
GDP may even decline
We call this…
CONTRACTIONARY FISCAL POLICY
Tool #1:
Tool #2:
DECREASE
GOVERNMENT
SPENDING
INCREASE
TAXES

Government buys less goods & services


There is a decrease in aggregate demand
because the government is buying less than
before
Individuals have less money to spend on
goods & service, or to save for the future

Businesses keep less of their profits and
decrease their spending on land, labor, and
capital

As demand decreases, prices fall

Suppliers produce less & possibly fire
workers
Lower production slows down the rate of
growth of the economy

Prices of goods and services drop

Suppliers produce less & possibly fire workers

Lower production slows down the rate of
growth of the economy

QUIZ:
1. What type of fiscal policy should be
enacted when we are in an economic
recession?
EXPANSIONARY!
(Increase Government Spending or Cut Taxes)
2. What type of fiscal policy should be
enacted when high inflation is a problem?
CONTRACTIONARY!
(Decrease Government Spending or Increase Taxes)
Multiplier Effects:
Government interventions trigger a “domino” effect