Transcript Fiscal Policy Government action to influence the economy

Fiscal Policy
Government action to influence
the economy
Reference 15.1
Fiscal Policy
• Expansionary: Increase total spending to
reduce unemployment
• Contractionary: Reduce total spending to
reduce inflation
Expansionary Fiscal Policy
•
The government can decide to:
1. Increase government spending
2. Lower taxes
3. Do both
Will this policy achieve its goal????
maybe…
• Will additional government spending
“crowd out” private spending?
• Example: An additional $2,000,000 dollars spent on
education by government may result in consumers
spending $2,000,000 less on private school tuition.
• A Comparison: “Harry Potter”
John Maynard Keynes
The General Theory of Employment, Interest, and Money
• 1883-1946
• Revolutionizes thinking about
the government’s role in the
economy.
– Influential to the “New Deal”
• Argued for expansionary
fiscal policy in times of
recession or depression
Contractionary Fiscal Policy
•
The government can decide to:
1. Reduce government spending
2. Increase taxes
3. Do both
NOT VERY POPULAR…But will it work?
maybe…
• Will private spending “crowd in”? Will
consumers spend more when faced with
less government spending?
• Example: The schools are so under-funded
that parents spend money to put their kids in
private schools.
How Taxes Can Affect Spending
• After-tax income: what you have left to
spend after you’ve paid income taxes.
• Higher after-tax income increases demand
(expansionary) low tax rate
• Lower after-tax income decreases demand
(contractionary) high tax rate
How Taxes Can Affect Supply
• If you were taxed at 100%, would you
work?
• High tax rates can reduce productivity
Tax Rates ….Tax Revenues
• Will higher tax rates give the government greater
tax revenues?
• Will lower tax rates give the government smaller
tax revenues?
Only if INCOME is constant.
Laffer Curve
• controversial theory
• created by economist Arthur Laffer
• represents the relationship between tax
rates and tax revenues.
• What is the ideal tax rate?
Review
• What is expansionary fiscal policy, and for
what purpose is it likely to be
implemented?
• What is contractionary fiscal policy, and for
what purpose is it likely to be
implemented?
Review
• Is expansionary fiscal policy always
effective at increasing total spending and
decreasing unemployment?
• Explain your answer?
Review
• Someone says, “If the federal government
cut income tax rates, tax revenues will
rise.” Might this person be wrong?
Explain your answer.
Homework
• Read and note Ch. 16.1 “Taxes”
pages 418-430.
• Complete Section Review p. 430 #2-4
• Current Issue: How will the repeal of the
Bush tax cuts affect the economy?