Download Fiscal Policy - Solon City Schools

Fiscal Policy
Using taxes and government spending to
influence the economy
Who controls fiscal policy?
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Each year the president and his advisors
create a federal budget.
Congress must approve that budget.

Determines how much tax revenue the
government will bring in and how much money
they will spend on programs.
Raising Taxes
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If the government needs more money, it can raise
taxes.
How will raising taxes affect the economy?
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If taxes increase, citizens have less money in their
pockets.
What is the impact on production (GDP), consumption,
and employment?
Overall, did the economy expand or contract?
Tax Cuts

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If the government reduces tax rates, there will
be less money in the budget.
How will reducing taxes impact the economy?
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Citizens will have more money in their pockets
to spend on goods and services.
What is the impact on production (GDP),
consumption, and employment?
Overall, did the economy expand or contract?
Increasing Government Spending

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If the government creates new programs for
citizens, they will need more money in the
budget.
How will an increase in spending affect the
economy?

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Citizens will have more benefits.
What is the impact on production (GDP),
consumption, and employment?
Overall, did the economy expand or contract?
Decreasing Government Spending

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If the government cuts back on programs, they
will need less money in the budget.
How will a decrease in spending affect the
economy?

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Citizens will have fewer benefits.
What is the impact on production (GDP),
consumption, and employment?
Overall, did the economy expand or contract?
Discussion

If the country was attacked and needed to go
to war, what fiscal tools would the government
need to use to pay for the war?

Why is it rare for politicians to increase taxes
even when the economy is in deficit?
Discussion

If a country has a national debt of 8 trillion
dollars and is in recession, why should the
government be cautious when using fiscal tools
to stimulate growth?

Hint: Consider the impact of simultaneously
increasing government spending and cutting
taxes.