Transcript Fiscal Policy Strategies 15.2

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:
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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.