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Fiscal Policy

Fiscal Policy

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Fiscal Policy

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  1. Fiscal Policy Using taxes and government spending to influence the economy

  2. Who controls fiscal policy? • Each year the president and his advisors create a federal budget. • Congress must approve that budget. • Determines how much tax revenue the government will bring in and how much money they will spend on programs.

  3. Raising Taxes • If the government needs more money, it can raise taxes. • How will raising taxes affect the economy? • If taxes increase, citizens have less money in their pockets. • What is the impact on production (GDP), consumption, and employment? • Overall, did the economy expand or contract?

  4. Tax Cuts • If the government reduces tax rates, there will be less money in the budget. • How will reducing taxes impact the economy? • Citizens will have more money in their pockets to spend on goods and services. • What is the impact on production (GDP), consumption, and employment? • Overall, did the economy expand or contract?

  5. Increasing Government Spending • If the government creates new programs for citizens, they will need more money in the budget. • How will an increase in spending affect the economy? • Citizens will have more benefits. • What is the impact on production (GDP), consumption, and employment? • Overall, did the economy expand or contract?

  6. Decreasing Government Spending • If the government cuts back on programs, they will need less money in the budget. • How will a decrease in spending affect the economy? • Citizens will have fewer benefits. • What is the impact on production (GDP), consumption, and employment? • Overall, did the economy expand or contract?

  7. Discussion • If the country was attacked and needed to go to war, what fiscal tools would the government need to use to pay for the war? • Why is it rare for politicians to increase taxes even when the economy is in deficit?

  8. Discussion • If a country has a national debt of 8 trillion dollars and is in recession, why should the government be cautious when using fiscal tools to stimulate growth? • Hint: Consider the impact of simultaneously increasing government spending and cutting taxes.

  9. Fiscal Policy Overview • The health of a nation’s economy is influenced by governmental policy (fiscal policy) • Fiscal policy can be used to spur economic growth • Economic policy decision made by government result in both intended and unintended consequences

  10. Unintended Results Effects of Fiscal Policy Intended Results What the government MEANT to happen Spur economic growth Increase consumer spending Increase employment What the government DID NOT MEAN to happen Unforeseen problems Backlash against programs/spending

  11. Government Taxing • Personal Income Tax – a percentage of gross income • Sales Tax – on items purchased • Property Tax – a percentage value of your land/house • Tariffs – placed on imports

  12. Short Term Government Programs Permanent Social Security – retirement/disability Overview of Information Medicare– government funded health care coverage Entitlements – items above, plus salaries and benefits for employees Government Stimulus Checks – one time payments intended to spur spending CARS – aka – “Cash for Clunkers” – intended to promote growth in struggling auto industry

  13. Unintended Effects of Programs Social Security – Medicare – Stimulus Checks – CARS -

  14. Policy Example - CARS • Intended Purpose – to encourage consumer spending on new vehicles • Boost the struggling American automobile industry • Production and Sales • Unintended Results – 6/10 top 10 cars sold were foreign models Top Ten Sales • Still promotes American economy growth • Many people who wanted to participate were ineligible • Unknown long-term effects – especially on employment • Increased government spending – incentive to buyers (discount financed by the federal government)

  15. Unintended Effects Tax Example – Hawley-Smoot Tariff 1930: increased taxes on agricultural and industrial imports to record high Intended Effects Regulate commerce with foreign countries Protects American jobs and farmers Encourage American industry and production Trading partners retaliate: reduce American exports by ½ (23 official protests) Spike in unemployment World trade decreased 66% between 1929 and 1934