Transcript Fiscal Policy

Fiscal Policy
Two types of fiscal policy


Expansionary – increased spending or
decreased taxes
Contractionary – decreased spending or
increased taxes
Type of fiscal
policy
Changes in
government
spending
Changes in
taxes
Expansionary
Increase
Decrease
Contractionary
Decrease
Increase
Crowding out




Increased government spending doesn’t
necessarily lead to increased total
spending
Private spending may decrease
Complete crowding out means no gain in
total spending
Crowding out could be incomplete
John Maynard Keynes




Too little spending = high unemployment
Previously economists thought decreased
spending = lower prices
Keynes said this wouldn’t happen because
workers wouldn’t accept lower wages
Therefore we needed expansionary
policies
Criticisms of Keynes


Doesn’t consider crowding out
Opened the door to government
intervention into the economy
Crowding in


Decreased government spending doesn’t
= decreased total spending
Crowding in can be complete or
incomplete
Tax policies



After-tax or disposable income = income
left after taxes are paid
Lowering taxes = increased after-tax
spending
Raising taxes = decreased after-tax
spending
Supply side

The lower the tax rate, the more people
are willing to work

This increases supply

This helps the economy
Tax cuts and tax revenues



Will cutting taxes decrease tax revenues??
Lower taxes might lead to increased
income since people are willing to work
more
This will actually increase tax revenue
Condition
existing
Total
spending
affected?
Policy
meet
objective ?
Expansionary
policy
No Crowding
out
Yes
Yes
Reduce
unemployment
Expansionary
policy
Complete
Crowding
Out
No
No
Reduce
unemployment
Expansionary
policy
Incomplete
crowding out
Yes
Yes
Reduce
inflation
Contractionary
policy
No crowding
in
Yes
Yes
Contractionary
policy
Complete
Crowding
in
No
No
Incomplete
crowding in
Yes
Yes
Policy
Reduce
unemployment
Reduce
inflation
Reduce
inflation
Contractionary
policy