Fiscal Policy

LT 4

5/23/2016

Who is responsible for monitoring the U.S. Economy?�Section 14.2

5/23/2016

1. Federal Government – use “Fiscal Policy” – the government’s policy to tax & spend – to get an economy moving again or address inflation

Who is responsible for monitoring the U.S. Economy?

5/23/2016

2. Federal Reserve System (the Fed) – uses “Monetary Policy” – central bank policy aimed at regulating the amount of money in circulation; control over the money supply & interest rates – to lower inflation & stimulate growth

Learning Target Pg. 8

• Deficit Spending: When expenditures exceed the amount of tax revenue.
• Surplus: Tax revenue exceeds government expenditures in any given year

5/23/2016

Key Terms

5/23/2016

• Stagflation – A combination of economic stagnation – or slowdown – and high inflation
• features of stagflation include slow or zero economic growth, high unemployment, & rising prices

Using Tax Cuts to Stimulate Growth

5/23/2016

1. Demand-Side Economics Best way to deal with slowing economy is to stimulate demand by cutting individual income taxes

Learning Target Pg. 7

Using Tax Cuts to Stimulate Growth

5/23/2016

• Supply-Side Economics -Best way to ensure economic growth economy is to stimulate supply by cutting taxes on businesses & high-income taxpayers

-Producers & investors will use money to expand business

John Maynard Keynes

• He believed the only way to stop the downward economic spiral is for political leaders to use fiscal policy to increase overall demand (cut taxes, increase Gov’t spending by borrowing).
• Rising demand stimulates production, more production puts people back to work, economy begins to grow

​

5/23/2016

Milton Friedman and FA Hayek

• Opposed Keynes’ views
• Felt that way to influence the economy was through monetary policy, not through government spending.
• Rap Battle (7:30) https://www.youtube.com/watch?v=d0nERTFo-Sk

​

5/23/2016

Rap battle vocab

Boom- economy is doing well

Bust- economy is doing bad

Animal spirits- consumer confidence

The Multiplier Effect

5/23/2016

When the government spends money on goods & services, the impact on the economy is generally greater than the amount of money spent – each dollar spent encourages still more spending

The Multiplier Effect

5/23/2016

Works 2 ways:

-Helps the economy grow when the government increases spending

-Slows economic growth when the government cuts spending

5/23/2016

The Multiplier Effect – Page 281

What Tools Does Fiscal Policy Use to Stabilize the Economy? – 14.3

5/23/2016

• Expansionary Fiscal Policy – The goal is to increase economic activity by: -increasing government spending

-decreasing taxes,

or both

What Tools Does Fiscal Policy Use to Stabilize the Economy?

5/23/2016

• Contractionary Fiscal Policy – The goal is to decrease economic activity by: -decreasing government spending

-increasing taxes,

or both

5/23/2016

Fiscal Policy Tools – Page 279