Transcript Macroeconomics – Fiscal Policy

Macroeconomics – Fiscal Policy
► Hold
your excitement.*
► Fiscal
policy refers to
how government
taxing and spending
policy can be used to
influence the
macroeconomy.
► It has nothing to do
with Nazi dictators and
dancing cats.*
Ye olde definition
► Fiscal
policy is the
changes in the
expenditures or tax
revenues of the federal
government,
undertaken to promote
full employment, price
stability and
reasonable rates of
economic growth.*
Which means..
► In
the short term,
fiscal policy can be
used to reduce the
extremes of recession
and inflation. *
And…
► If
the economy is in
recession, then an
expansionary fiscal
policy can increase
aggregate demand
through some
combination of tax
cuts and/or spending
increases.
► In English that means
increasing output and
cutting unemployent.*
On the other hand
► If
an economy is suffering
inflation, then a
contractionary fiscal policy
can reduce aggregate
demand through some
combination of tax
increases and/or spending
cuts.
► In English that means
decreasing aggregate
demand in the economy
and controlling inflation.*
So?
► Fiscal
policy can be
misused and have
unintended
consequences or side
effects.
► But that would imply the
leaders in our
government weren’t
looking out for us or
working in our best
interests.
► If
a highly
expansionary policy of
tax cuts and/or
spending increases is
used at a time when
the economy is not in
a recession, it can
increase aggregate
demand in a way that
leads to inflation.*
► If
a contractionary
fiscal policy of tax
increases and/or
spending cuts reduces
aggregate demand
when an economy is
already in or near
recession, it can make
the recession deeper
and longer.*
►
An increase in taxes
can also affect people's
willingness to work,
save and invest, and
this could cause a
decrease in economic
growth.*
Fiscal Policy vs Monetary Policy
► So,
in some ways fiscal
policy is similar to
monetary policy in that
they both try to promote
growth, control inflation,
and keep prices stable.
 But think of it this way:
• Monetary policy is an
indirect approach.
• Fiscal Policy is a direct
approach.