Transcript Fiscal Policy - Gore High School

Fiscal Policy
Government Economic Policies
Fiscal
Policy
Government
Economic
Policies
Supply Side
Microeconomic
Policy
Monetary
Policy
Fiscal Policy
Fiscal Policy : Taxing and spending by the government
to influence the level of economic activity
Taxation
Spending
Government Spending
• Expenditures by the government
• Governments spend money in the economy in a
number of ways
– Education
– Health
– Transfer payments
– Army
Expansionary/ Loose Fiscal Policy
• Designed to boost economic growth by
increasing injections into the economy
• The government can use expansionary fiscal
policy in two ways
– Increase Government Spending
– Decrease Taxation
Increased Government Spending
• Governments should spend money to stimulate the economy.
– Increased welfare spending
• Leads to households income to rise, consumption will increase as will firms
output
– Funding major projects like highways or hospitals
 Designed to provide a suitable environment for businesses to preform and grow.
Leads to firms output increasing so investment spending rises
 e.g. Spending to improve Auckland’s traffic congestion, improved public
transport
– Increased spending on education
 designed to increase labour productivity. e.g. Subsidied work schemes and
training
– Funding more research and development
• New technology will arise, this will increased productivity
Taxation
• Any tax cut by the government will stimulate the
economy.
• Direct tax cuts means consumers have more
disposable income leading to an increase in
consumption spending.
- This could lead to inflationary pressures
Reduction in direct taxes
Increased disposable incomes
Increased demand for goods and services (consumption increases)
AS
PL’
PL
AD’
AD
ye y’
Increased production (Investment Increases)
Amount of goods and services produced in an economy increases
(GDP increases, growth increases)
Increased demand for labour
So output has gone up but so to have prices. If enough prices go up the we can expect
employees to demand higher wages. Higher wages mean costs of production increases
which will push supply to the left.
Expansionary Fiscal Policy and Growth
• Increased Government spending
G
• Decreased Taxation
C
AD = C + I + G +(X-M)
AS
AD increases from AD
to AD’
PL’
PL
Output increases from
ye to Y’
AD’
AD
Leads to increase in
GDP
ye y’
Leads to increase in
economic growth
GDP = C + I + G + (X-M)
Contractionary/ Tight Fiscal Policy
The government can use contractionary fiscal
policy in two ways
– Decrease Government Spending
– Increase Taxation
– Contractionary fiscal policy will lead to the AD
curve falling.
– Thus will have the effect of reducing price level
(inflation) and helps maintain price stability.
However output will fall as a result.
Work Books
• Page 200 – Fiscal and Growth
• Page 197 – Fiscal and Price Stability
Contractionary Fiscal Policy
• Two ways the government can implement
contractionary fiscal policy
– Increased Taxation
– Decreased Spending
Increased Company Taxation
• Output has fallen and prices
have risen yet again.
AS’
AS
PL’
• Stagflation= economy
experiencing no growth while
experiencing inflation
PL
AD
Y’
Ye
• Also risk a decrease in
exports as NZ goods become
relatively more expensive.
Governments Operating Balance
• Tax- leakage from circular flow
• Spending- injection into
circular flow
• When tax=spending there is no increase in
GDP in terms of G (Balanced Budget).
Operating Balance is zero
Governments Operating Balance
• When tax > spending Govt. is running a budget surplus…
• called contractionary fiscal policy.
• When tax < spending… Govt. is running a budget deficit…
called expansionary fiscal policy.
• Govt. uses expansionary fiscal
policy when spending is down
(demand) to keep growth in positives.
Fiscal Policy
• History of fiscal policies
– Often used expansionary policies
– 1930s govt acted to drag the economy out of
depression
– Think big projects of 1970s and 1980s meant to
reduce NZ dependence on overseas oil and create
400,000 jobs. Pushed up govt spending and did
not create as many jobs as hoped.
• Fiscal Responsibility Act 1994: aimed at running
budget surpluses therefore CONTRACTIONARY in
nature (enables debt to be paid off)
Activities
• Fiscal policy and inflation
• Work Book page 201-202
• Fiscal Policy and Growth
• Workbooks page 208-209
• Fiscal Policy and Unemployment
• Workbooks page 223- 224