Income Distribution

Refers to how a nation’s total GDP is distributed amongst its population.

Distributed unequally to different families in the country; rich, middle income and poor families.

Lorenz Curve:

A curve showing the proportion of national income earned by a given percentage of the population.

e.g what proportion of national income is earned by the top 10% of the population?

Lorenz Curve% of National Income

Percentage of Population10%

10%

30%

30%

This line represents the situation if income was distributed equally. The poorest 10% would earn 10% of national income, the poorest 30% would earn 30% of national income.

Lorenz Curve% of National Income

Percentage of Population30%

20%

7%

In this second example, the Lorenz curve lies further below the line of equality. Now, the poorest 30% only earn 7% of the national income.

•The total level of government spending can be changed to help increase or decrease the output of the economy

Expansionary Policies: Policies that try to increase the output of the economy.Contractionary Policies: Policies that try to decrease the output of the economy.

Fiscal Policy and the Economy

Discretionary Fiscal Policy

The deliberate manipulation of taxes and spending by government for the purpose of altering real GDP and employment, controlling inflation and stimulating economic growth

Expansionary Policies

During a contraction or recession, the government can do two things:

1. Decrease taxes2. Increase spending

Decrease taxes Gives people more money

to spend Increase demand Increase production increase jobs increase jobs = more

demand etc. etc.

Increase spending Increases demand

for goods Increase

production increase jobs increase jobs =

more demand etc. et

•Favored by Republicans

Let people decide what to spend their money on and let those who earned the money benefit from it.

•Favored by Democrats

Government should spend to redistribute wealth to the poor, rather than give the rich a tax cut

Who favors the policy?

Decreasing Taxes Increase Spending

Contractionary Policies

During a period of excessive inflation (during a period of expansion), the government can do two things:

1. Increase taxes2. Decrease spending

Increase Taxes• People have less

money to spend• Less money = less

demand• Less demand = lower

inflation

Decrease Spending• Less money in

economy• Less money = less

demand• Less demand = lower

inflation

Who favors which policy?

Trick Question! Neither party favors Contractionary Fiscal Policies!!!

This is one of the problems with Fiscal Policy