Transcript Fiscal Policy-15

EOCT Review Question #1

During what stage of the business cycle
would frictional unemployment be the
largest?
A.
B.
C.
D.
Peak
Recession
Trough
recovery
EOCT Review Question #2

A.
B.
C.
If we have progressive tax system and
Billy pays $1.000.00 on his $10,000
income, what is true of Sue’s tax
liability if she earns $40,000.00?
It is exactly $4,000.00
It is less than $4,000.00
It is more than $4,000.00
EOCT Review Question #3

A.
B.
C.
D.
Which of the following would cause costpush inflation?
20%
20%
20%
20%
increase in natural gas prices
growth in the stock market
cut in federal income tax
increase in grain production
EOCT Review Question #4

A.
B.
C.
D.
Which group is most likely to suffer from
higher rates of unemployment and
poverty than most others?
Minorities
People with limited education
Single parents
Two-parent families
Fiscal Policy
Chapter 15
Points to Remember
 Prior
to the Great Depression
economists believed that the best
way to stabilize the economy was
through the natural market forces
 Adam
Smith and supply side
economics
After the Great Depression
 Remember:
– Keynes
– government needs to aid the economy
– demand side economics
Know these!
Fiscal “Tools”
1. Government Purchases/Spending
2. Transfer Payments
3. Taxes
…and how these three affect
macroeconomic variables such
as real GDP, employment, the
price level, and economic growth
What is Fiscal Policy?
Government taxing and
spending used to move the
economy toward full employment
with price stability
 Potential output- the maximum
sustainable output in the long run
given the supply of resources,
technology and “rules of the
game” that nurture production
and exchange

– AKA- full employment output and
price stability
How just a little Fiscal Policy can
effect our economy in a BIG way.
$150
$400
$150
(already in
$200 $50
his pocket)
$200 already in
his pocket)
Multiplier Effect
For
every dollar spent by the
federal government, GDP will
increase by more than that $1.
This
could also be affected by
business invention or change in
consumption - but Keynes
focused on the government’s role
in his book General Theory.
Fiscal Policy and Taxes
 An
increase in tax rates = decreased
disposable income = consumption &
real GDP decrease
A
decrease in taxes = increases
disposable income = consumption &
real GDP increase
 What
is disposable income?
Fiscal Policy and Taxes
Taxes
Disposable
Income
Consumption &
Real GDP
Taxes
Disposable
Income
Consumption &
Real GDP
So which is better HIGHER or LOWER TAXES?
WHY?
Disposable Income

This is the income
available after taxes

This is the money
consumers have to
spend

Less taxes = more
money to spend
SAY IT WITH ME: “We like Disposable Income!”
Quick Review
 What
are the 3 components of fiscal policy?
 What
will higher taxes result in?
 What
is the multiplier effect?
 What
is disposable income?
EOCT REviEw…
How do they calculate the GDP?
C + I + G + (X – M) = GDP
EOCT REviEw…
What happens to the GDP in each of
these scenarios? What aspect of GDP is
affected and how?
 The government decides to hire 3,500
new employees to work as park rangers.
 Consumers by fewer American made
cars, and more Japanese made cars.
 Businesses are optimistic about the
future, they begin to build more factories
 Due to better economic conditions in
Europe, Europeans purchase more
American goods and services.
Government Use of Fiscal Policy
1.
When the economy is in a slump
(recession or depression) the economy
has contracted.

The government will enact an
Expansionary Fiscal Policy to help
boost the economy.
Government Use of Fiscal Policy
2.
When the economy has picked up
the pace (an economic boom) the
economy has expanded.
 The government will enact an
Contractionary fiscal policy to help
slow down the economy.
Difficulty in Calculating Effects
 Remember
 It
the multiplier effect.
is difficult to judge how large of an
expansion or contraction a change in
any single fiscal policy (taxes,
transfer payments, etc) will produce
in the economy
Sum it up...
Economy is in
a recession or
depression
Expansionary
Fiscal Policy
Economy is in
a boom
Contractionary
Fiscal Policy
Two Categories of Fiscal Policy:
1) Discretionary fiscal policyrequires congressional action
2) Automatic Stabilizers- usually the
results of these actions in the
future (unemployment insurance)