Fiscal Policy

What is fiscal policy? The setting of the level of government

spending and taxation by government policy makers. (Clifford Video)

Tax and Spend Review Chapter 8 Chapter 12 (Packet Review & Tax Article) IOUSA Deficits

1. Budget2. Savings3. Trade4. Leadership (Ron Paul)

Tools of Fiscal Policy Influences on aggregate demand

Increase in government purchases Decrease in taxes

Multiplier Effect (Clifford Video) The additional shift in aggregate demand that result

when expansionary fiscal policy increases income and thereby increases consumer spending.

Marginal Propensity to Consume (MPC) Multiplier = 1/ (1-MPC)

Crowding Out Effect The offset in aggregate demand that results when

expansionary policy raises the interest rate and thereby reduces investment spending

Tools of Fiscal Policy Tax cuts

AD Increase tax home pay= increase consumer spending Multiplier and Crowding Out

SRAS “Supply siders”

Permanent vs. Temporary Cuts Automatic Stabilizers

Changes in fiscal policy that stimulates AD when the economy goes into recession w/o policymakers having to take any deliberate action

Taxes (lower income = lower taxes) Spending (welfare, unemployment) Paul Solman “Making

Sense”

Fiscal Policy: Problems and Applications Question 4: Impact of Tax Cuts Question 8: Taxes and MPC Question 12: Automatic Stabilizers

Question 4

Question 8

Question 12