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Fiscal Policy Strategies Warm Up: Who carries out Fiscal Policy and what are their tools? Fiscal Policy Strategies • Supply Side Economics—focuses on achieving economic stability and growth by increasing the supply of goods and services throughout the economy. – Governments role limited – Increased government incentives for business; encourages hiring of workers – Leads to lower unemployment rate – These workers then buy more goods/services Elements of Supply Side Economics • Supply side economists believe: – – – – – – Government adopt laissez-faire approach Favor tax cuts to stimulate the economy Policy helps create new businesses This increases tax revenues Reduce government regulations Reduced regulations, lower business costs Demand Side Economics Keynesian • Demand side economics—focuses on achieving economic growth through the government’s influence on aggregate demand. – Increasing aggregate demand through market forces was not enough. – Government involvement was necessary in order to achieve full employment and improve sluggish business activity. Expansionary and Contractionary fiscal policy • Expansionary fiscal policy - increase in government expenditures and/or a decrease in taxes. – that causes budget deficit to increase or its budget surplus to decrease. • Contractionary fiscal policy - decrease in government expenditures and/or an increase in taxes. – that causes budget deficit to decrease or its budget surplus to increase. Limitations of Fiscal Policy • 1. Timing Problems—In order to be effective, policies like medicine, must be taken at the proper time and in the proper doses. – Forecasting is an inexact science – There are time lags from when a policy is implemented until results are seen. Limitations of Fiscal Policy • Political Pressures—Elected officials are afraid of being voted out of office which affects their judgments. • Restrictive Fiscal Policy—Increases taxes and reduces government spending. • Expansionary Fiscal Policy—Decreases taxes, increases gov’t spending, and usually popular with the people. • Unpredictable Economic Behaviors—People don’t always respond the way that economists think that they will. Limitations of Fiscal Policy • Lack of Coordination—Fiscal policy needs to be coordinated with monetary policy. – The federal, state, and local governments have to coordinate their policies.(taxation and spending policies). – The Fed and Congress often have different ideas about what to do.