Fiscal PolicyThe government helping stabilize the economy through taxing, spending, and borrowing.

Four main areas of learningHistory

Tools

Taxes

Inflation/Recession

HISTORY

Fiscal policy was born in 1932.

What economic problem was occurring?

Before 19321. Classical Economics2. Adam Smith3. No government involvement in the

economy4. Low debt/taxes5. No assistance programs6. Government doesn’t provide

economic stability.

One good thing

One Bad thing

After 19321. FDR elected2. John Maynard Keynes3. Government should spend money to

promote growth and stability during downturns.

4. FISCAL POLICY BORN – government taxing, spending, and borrowing programs to promote economic stability

5. Government assistance6. Possibility of higher debt/taxes

One good

One bad

Keynesian = Fiscal Policy Fiscal Policy – government’s taxing,

spending, borrowing policies to stabilize the economy

Discretionary – Congressional changes in Fiscal Policy

Discretionary FPChanges made to Fiscal Policy by Congress

POSTERChoose either Classical or Keynesian to support.Create a poster supporting your theory of choice. It must include:1. Your theory name2. A visual3. A slogan

TOOLSThis is referencing what the government uses to fight inflation or recession

#1Tool Spending

Federal budget – income versus your expenses listed

Balanced budget – income = expenses Budget surplus – income is greater than

expenses budget deficit– income is less than expenses

Deficit spending – borrowing money to cover expenses

National debt – a result of deficit spending. Accumulation of debt

Most budgets are set on a Fiscal Year – an accounting year for businesses.

#2 tool Taxes – government income

#3 toolBorrowing – to promote

growth, the government can borrow money to fund programs that will stimulate the economy.

#4 toolAutomatic stabilizers

Government programs that were created to automatically fight inflation/recession.

Example – income tax

#5Supply side economics –

using businesses to fix the economy

Demand side economics – using consumers to fix the economy

“taxes”A tax is a payment to the

government. Our income is taxed and we have to pay a sales tax on purchases at the store.

3 types of taxes1. Progressive tax

As income increases, so does the amount of tax that we have to pay.

Example – income tax

#2 Proportional Tax A tax that is the same percentage for all Example – sales tax and an excise tax.

An excise tax (sin tax) is levied on gas, tobacco, alcohol, and the lottery.

Fair tax is a hot topic! Fairtax.org

#3 Regressive TaxA tax that hurts the lower

income consumer because it is harder for them to pay it due to their low amount of disposable income.

Example, sales tax and excise tax

Change in tax structure movement…Some people do not like the current income tax. Therefore, an idea was created as a substitute for the income tax. It is a national based sales tax which would eliminate the income tax.

Look at http://fairtax.org

Writing assignment After going over tax information,

do you believe that the tax structure should stay the same or change? Do you believe we should keep the income tax (progressive) or eliminate it and only have a nation wide sales tax?

This must be at least 7 sentences. You must have three reasons to support your opinion.

Flap Inflation and Recessions

Fiscal policy

Inflation Recessiontoo much money not enoughgoal: lower AD goal: Increase ADGDP, CPI higher GDP, CPI low

InflationRestrictive Fiscal Policy

(Contractionary FP)Taxes

SpendingBorrowing

Automatic stabilizers (welfare, unemployment go down)

RecessionExpansionary Fiscal Policy

Taxes SpendingBorrowing

Automatic stabilizers increase on welfare and unemployment

Review FEDName one tool the FED would

use to fight recession and tell how they would use it.

Name one tool the FED would use to fight inflation and tell how they would use it.

Fix it!GDP is low, CPI is low, Unemployment is high. Would FP…Lower taxesIncrease taxes

Fix it

Expansion in the market

Increase spendingDecrease spending

FIX ITWhen would Fiscal policy increase borrowing?

InflationRecession

Fix itDuring a recession, what economic policy would promote stability in the market?a. Fed raise Reserve requirementb. Government raise taxesc. Government lower borrowingd. Fed lower Reserve requirement

Fix itIf policy was being directed towards the producer and the government is using Contractionary Fiscal policy, who is the Government using to help stabilize the economy and what is the economy experiencing?a. Supply side, recessionb. Demand side, recessionc. Demand side, inflationd. Supply side, inflation

Fix itIf GDP is low, what would the FED do to promote economic growth?a. Increase the reserve

requirementb. Increase the Federal funds ratec. Decrease the discount rated. Decrease taxes

Fix itPeople have found that they are paying more income taxes. What term best describes this situation?a. Supply side economicsb. Expansionary fiscal policyc. Restrictive fiscal policyd. Tight money policy