Fiscal Policy

What does the term “fiscal” mean?

Anything related to government revenue, spending, and debt

Define fiscal policy

The federal governments use of taxes and government spending to affect the economy

What are the two goals of fiscal policy?

• Increase aggregate demand

• Fight inflation

When will the government use expansionary fiscal policy?

When the economy slows down

When is contractionary fiscal policy used?

When the economy is in an inflationary period

What is expansionary fiscal policy designed to do?

To stimulate a weak economy to grow

What is contractionary fiscal policy designed to do?

To slow the economy down in order to control inflation

In expansionary fiscal policy, does the government want to increase or decrease aggregate demand?

Increase aggregate demand

Expansionary fiscal policy does what to government spending and what to taxes?

Increases government spending

Decreases taxes

Example of increased government spending

The government increasing spending for highways in a recession

What taxes might be lowered in expansionary fiscal policy?

Individual and corporate income taxes

In contractionary fiscal policy, does the government want to increase or decrease aggregate demand?

Decrease aggregate demand

What is it called when the economy is growing too rapidly and aggregate demand is increasing faster than supply?

Demand-pull inflation

Contractionary fiscal policy does what to government spending and what to taxes?

Decreases government spending

Increases taxes

What is an example of cuts in government spending?

Cutting government spending on a variety of programs such as highway construction, education, and healthcare

Expansionary fiscal policy (Decrease taxes, increase government spending)

Aggregate demand: Up

GDP (Aggregate supply): Up

Jobs: Up

Prices: Up

Contrationary fiscal policy (Increase taxes, decrease government spending)

Aggregate demand: Down

GDP (Aggregate supply): Down

Jobs: Down

Prices: Down

Limitations of Fiscal Policy

1. Policy lags

2. Political issues

Lags

Delayed behind economic issues

Takes congress _ on how to implement fiscal policy

Months to decide

The _ of the Council of Economic Advisors due to reelection concerns

President may not follow

Example contractionary policy involves doing what to taxes?

Increasing taxes

Presidents are unwilling to use fiscal policy that would be _ with voters

Unpopular