Fiscal Policy

MT 3 LT 2

Question

• The economy is not growing, people are losing jobs, and people are not spending money. Should the government attempt to fix this problem? How or why not?

• Inflation is getting way out of hand, prices are rising as wages are staying the same. People are spending way beyond their means. What can be done to slow this down?

What is Fiscal Policy?

• The use government spending and taxation to reach macroeconomic goals.

• Three goals are:1. Low inflation

2. Low unemployment

3. High and sustained growth

Who controls the policy?

• Fiscal policy is run and directed by the Legislative (Congress) and executive (President) branches.

• Step 1: president creates budget• Step 2: Congress reviews and either accepts

or pushes for changes• Step 3: If Congress Ok’s the budget, back to

President to sign, if not, start over again.

How is it used?

• According to John Maynard Keynes, government must get involved to solve economic problems (C+G+I+F(X))

• Slow economy = need to stimulate spending– Therefore put more money into people’s

pockets. (Demand-Side Economics) • Tax cuts to the people

– Therefore stimulate business growth (Supply-side economics or trickle-down) • Tax cuts to businesses

Using Taxes

• To possibly get more money flow, government can cut taxes. (Expansionary policy)• More money in people’s pockets, more chance to spend• More money businesses keep, more likely to expand

• To slow money flow, can raise taxes (contractionary policy)• Less money in pockets, people and businesses will cut back.

• Both used to control inflation

Categories of taxes

• Progressive: More you make, the more you pay– Can you think of an example?

• Regressive: More you make the less you pay– Sales tax???

• Proportional: All pay exact same percentage– Any examples come to mind?

Tax types…

• How many different taxes can you name?• What are they taxing?

1. Sales tax

2. Income tax

3. Excise tax

4. Property tax

5. Estate tax

6. Gift tax

7. Luxury tax

8. Import tax

Who pays the tax?

• Taxes are to be…– Simple– Fair– Efficient– Certain

• So who pays?– Ability to pay principle– Benefits received principle– Incidence of a tax

• Consumer or producer?

What effect do taxes have?

• Can change behavior of consumer and or producer.

• Change how resources are allocated.• Can affect growth and productivity.

Spending

– Spends $200 million an hour– $4.8 billion a day

• Economy is slow, government can spend more, therefore putting more money in circulation now. (Expansionary) • Creates demand in places where government is

spending

• Too fast, government can cut spending, therefore money is not being circulated. (Contractionary)

Types of spending

• Mandatory: By law– Debt repayments, welfare, social security,

medicare, medicaid, Obamacare– A lot of transfer payments

• Discretionary: by choice– Military– Education– Scientific development– Transportation– Law enforcement