Fiscal Policy

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Fiscal Policy

• Pages 447451
• Demand Side Economics
• Keynesian Economics
• Separated Monetary and Fiscal policy out-made
  them separate

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Fiscal Policy

• Governments use of taxes, tax incentives and
  government spending to affect the economy.
• 3 Tools of fiscal policy taxes, tax incentives
  and government spending.

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Fiscal Policy

• Originated in 1930s by John Maynard Keynes. Also
  known as Keynesian economics.
• Used to try to get the United States and Britain
  out of the Great Depression. The classical
  economic models did not work or explain the Great
  Depression.

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Fiscal Policy
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Fiscal Policy

• Demand side economics-stimulate demand to
  increase the economy or GNP.
• Keynes created the formula
• GNP C I G F
• To simulate the economy or fight unemployment,
  the government can changes taxes, change tax
  incentives or change government spending.

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Review

• Share with a partner-the 6 tools of government
  policy.
• To fight unemployment-what would you do with the
  3 tools of monetary policy?
• To fight inflation-what would you do with the 3
  tools of monetary policy?

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Fiscal Policy

• Government spending. The government spends money
  on many things. What do you think the government
  spends money on?
• Think of the Federal Government-?

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Fiscal Policy-Spending2007 Budget

• Social Sec-586B
• Defense-466B
• Medicare-394.5B
• Welfare/unempl-367B
• Medicad-276.4B
• Interest-243.7B
• Education-89.8B
• Transportation-76.9B

• VA-72.6B
• Justice-43.50B
• Natural Res-33.1B
• Foreign Aff-32.5B
• Agriculture-27B
• Community-26.8B
• Science/Tech-25B
• Energy-1.1B

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Fiscal Policy
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Fiscal Policy

• Receipts-taxes collected
• Individual Income tax-1.1 trillion
• Social Security-884B
• Corporate Inc Tax-260.6B
• Excise tax-74.6B
• Custom Duties-28.1
• Estate or Gift tax-23.7B
• Other-48.4B

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Fiscal Policy

• Deficit of 224B-Debt of 8.5Trillion
• Want to increase the economy and provide jobs?
• Will you change a group goal?
• What would your group spend the money on?
• List in order the top 10 expenditures
• What would you increase/decrease?

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Fiscal Policy

• Taxes-personal income taxes
• If taxes are lowered, people have more money in
  their paycheck and will spend more money.
• If taxes are increased, people will have less
  money in their paycheck and they will spend less
  money.

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Fiscal Policy

• Marginal Propensity to Consume (MPC)-for every
  dollar earned, how much one will spend on goods
  and services
• Marginal Propensity to Save (MPS)-for every
  dollar earned, how much one will save
• MPC MPS 1

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Fiscal Policy

• Automatic Stabilizers-programs that automatically
  trigger benefits if changes in the economy
  threaten income.
• There are 3 important stabilizers unemployment
  insurance, federal entitlement programs and
  progressive income tax

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Fiscal Policy

• Unemployment insurance is insurance that workers
  who lose their jobs through no fault of their own
  can collect for a limited amount of time.
• Cannot be collected if workers are fired because
  of misconduct or their quit their jobs

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Fiscal policy

• Federal entitlement programs are designed to
  provide a minimum level of health, nutritional
  and income levels for selected groups of people.
• Programs include welfare, government pensions,
  medicare, medicad, Social Security.

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Fiscal Policy

• Progressive income tax-if someone loses his or
  her job or they work fewer hours, the person will
  earn less.
• If the reduction in income is significant, the
  person will fall into a lower tax bracket and
  cushions the decline in income.

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Fiscal Policy

• To fight unemployment or increase GNP
• Lower taxes
• Change in C A1/MPS
• C Consumer spending
• A1tax increase or decrease if positive it is a
  tax decrease, if negative, it is a tax increase

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Fiscal Policy

• Change C A1/MPS
• -100B -10B/.10
• A 10Billion tax increase will cause a decrease
  in C-consumer spending by -100Billion, using the
  MPC of 90 or MPS of 10.
• People have less money in their pocket and will
  decrease their spending.

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Fiscal Policy

• To fight inflation or decrease GNP
• Increase taxes
• Change in C A1/MPS
• C Consumer spending
• A1tax increase or decrease if positive it is a
  tax decrease, if negative, it is a tax increase

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Fiscal Policy

• Change C A1/MPS
• 100B -10B/.10
• A 10Billion tax will cause an decrease in
  C-consumer spending by 100Billion, using the MPC
  of 90 or MPS of 10.
• People have more money in their pocket and will
  increase their spending.

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Fiscal Policy

• Government spending-
• To fight unemployment or increase GNP, raise
  government spending. Change G in
  formula-determine as group what to increase or
  decrease.
• To fight inflation or decrease GNP, lower
  government spending. Change G in
  formula-determine as a group what to increase or
  decrease

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Fiscal Policy

• Tax incentives-encourage business to follow a
  course of action.
• Investment tax credit encourages a business to
  build plant and equipment by giving the business
  a tax deduction for 50 of the money that they
  spending on business investments.

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Fiscal Policy

• Sales 500B
• Expenses 250B
• Profit 250B
• Tax 20million

• Sales 500B
• -Expenses 250B
• Profit 250B
• Spent 100B on investment
• Tax Credit 50B
• New Profit200B
• New Tax16million

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Fiscal Policy

• To increase GNP or fight unemployment, increase
  tax incentives to increase I
• To decrease GNP or fight inflation, decrease tax
  incentives to decrease I.
• Assume tax credit is 50-make your decision on
  this number. Then change your I
  accordingly-increase or decrease it.

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Fiscal Policy

• GNP C I G F
• Taxes changes C
• Tax incentives changes I
• Government spending changes G
• F? increase import taxes on foreign goods to
  reduce imports or add a tax incentive to
  companies that export goods to increase exports

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Fiscal Policy

• Fight unemployment-raise GNP
• lower taxes, raise government spending, increase
  tax incentives
• Fight inflation lower GNP
• raise taxes, lower government spending, decrease
  tax incentives