D:\Teaching\Economics\Year 12 Eco\Government Policies\Inpact of Inflationary Policies on Growth and Trade.doc

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D\Teaching\Economics\Year 12 Eco\Government
Policies\Inpact of Inflationary Policies on
Growth and Trade.doc
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Do now in pairs

• In pairs Classify each of the events on the cards
  under the following headings
• The business cycle
• Natural disaster
• Man-made disaster
• Change in government policy
• Overseas trade
• Now classify each event according to if it
  effects AS or AD initially
• Now classify each event according to weather it
  will increase or decrease real GDP

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SLO Understand and explain the impact of fiscal
policy on growth.

• By the end of this unit you will know
• What is fiscal policy?
• The governments operating balance
• Fiscal policy and the business cycle

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Government Economic Policies
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Fiscal Policy
Fiscal Policy Taxing and spending by the
government to influence the level of economic
activity
Taxation
Spending
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Taxation

• Any tax cut by the government will stimulate the
  economy.
• Direct tax cuts means consumers have more
  disposable income leading to an increase in
  consumption spending.
• - This could lead to inflationary pressures

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Reduction in direct taxes
Increased disposable incomes
Increased demand for goods and services
S
P
Pe
D
D
Qe
Q
Increased production
Increased demand for labour
So output has gone up but so to have prices. If
enough prices go up the we can expect employees
to demand higher wages. Higher wages mean costs
of production increases which will push supply to
the left.
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Taxation

• Output has fallen and prices have risen yet
  again.
• Stagflation economy experiencing no growth while
  experiencing inflation
• Also risk a decrease in exports as NZ goods
  become relatively more expensive.

S
S
P
Pe
D
Qe
Q
GDP
C
I
G
(X-M)
Income taxes
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Government Spending

• Expenditures by the government
• Governments spend money in the economy in a
  number of ways
• Education
• Health
• Transfer payments
• Army
• Governments should spend money to stimulate the
  economy. E.g.
• Increased welfare spending
• Funding major projects like highways or hospitals
• Increased spending on education
• Funding more research and development

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Governments Operating Balance

• Tax- leakage from circular flow
• Spending- injection into
• circular flow
• When taxspending there is no increase in GDP in
  terms of G (Balanced Budget). Operating Balance
  is zero

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Governments Operating Balance

• When tax gt spending Govt. is running a budget
  surplus
• called contractionary fiscal policy.
• When tax lt spending Govt. is running a budget
  deficit called expansionary
• fiscal policy.
• Govt. uses expansionary fiscal
• policy when spending is down
• (demand) to keep growth in positives.

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Examples of expansionary Fiscal Policy

• Goal of expansionary fiscal policy is to
  stimulate the economy and decrease the
  unemployment rate
• Government spending on education
• Government spending on regional development
• Government Spending on Investment and
  Infrastructure
• e.g highway construction
• Taxation

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Fiscal Policy

• History of fiscal policies
• Often used expansionary policies
• 1930s govt acted to drag the economy out of
  depression
• Think big projects of 1970s and 1980s meant to
  reduce NZ dependence on overseas oil and create
  400,000 jobs. Pushed up govt spending and did not
  create as many jobs as hoped.
• Fiscal Responsibility Act 1994 aimed at running
  budget surpluses therefore CONTRACTIONARY in
  nature (enables debt to be paid off)

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Activities

• Text book page 199 exercise 5.14
• Then
• Workbook page 152