Transcript Stabilization Policies Ch 15 S2

Fiscal Policies
Ch 30 Pg. 607
Mr. Henry
AP Economics
Fiscal Policies:
deliberate changes in government spending and tax
collections designed to achieve full employment,
control inflation, and encourage economic growth.
• Fiscal policies are discretionary, meaning that they are optional and
not mandatory
• The President relies on the Council of Economic Advisors to
provide expertise and assistance on economic matters.
• The Council of Economic
Advisors, established in
1946, is a group of three
economists appointed by
the President
• The Council bases its
recommendations and
analysis on economic
research, using the best
data available to support
the President in setting our
nation's economic policy.
• They assist and advise the
President in the
preparation of the
Economic Report
Expansionary Fiscal Policies:
an increase in government purchases of goods and
services, a decrease in net taxes, or some
combination of the two for the purpose of
increasing aggregate demand and expanding real
output
• The goal of expansionary fiscal
policy is to close a recessionary gap,
stimulate the economy, and decrease
the unemployment rate.
Expansionary fiscal policy is often
supported by expansionary monetary.
This will shift an economy’s
aggregate demand curve to the right.
Examples of expansionary fiscal tactics?
• Gov’t purchases are used to buy everything from
aircraft carriers to highway construction
• A decrease of the income tax rates or a one-time
rebate of taxes previously paid = more disposable
income
• Transfer payments: Social Security benefits to the
elderly and disable, unemployment compensation
to the unemployed, and welfare to the poor.
Which do you feel is most commonly used?
ISSUES??
What issues would expansionary fiscal policy create?
• Who gets the reduction in the tax burden?
• Those who meet the criteria for transfer payments, ie social
security, then receive payments.
• Additional government purchases leads to a relatively larger
government sector
• Typically results in budget deficits, where government is spending
in excess of tax revenues
Contractionary Fiscal Policy:
Fiscal policy can also be used to address inflationary
problems created by an overheated business-cycle
expansion.
• Contractionary fiscal policy is the opposite of
expansionary fiscal policy. It consists of decreasing
government purchases, increasing taxes, and
decreasing transfer payments. The resulting
decrease in the aggregate expenditures, causes a
decrease in aggregate production and thus
reduces inflationary pressures.
• Contractionary fiscal policy involves either an increase of the
income tax rates or a one-time surcharge. Higher taxes have been
used, but sometimes sparingly. Why?
• Contractionary fiscal policy involves a decrease in the funds
appropriated to the government’s assorted agencies. The agencies
then reduce their purchases which decreases aggregate production,
income, and the rate of inflation. Issue?
• The decrease in transfer payments reduces the disposable income
available to the household sector, which then forces a reduction in
consumption expenditures, leading to less aggregate production
and employment and subsequently a decrease in inflationary
pressures. Problems?