Fiscal PoliciesCh 30 Pg. 607

Mr. HenryAP 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 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:Fiscal policy can also be used to address inflationary problems created by an overheated business-cycle

expansion.

• 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?