fiscal policy

Daniel Begazo Lily Zhang

Sabrina Tan

What

is F

isca

l Po

licy?

Fiscal policy refers to the

government’s response

to inflation and/or recession in an economy

They accomplish this

through implementing

contractionary or expansionary policies

The tools they use are

spending and taxing

Eco

nom

ic Issues

Recession

A recession is a

period of

temporary

economic

decline

characterized by

a drop in GDP

and employment

Inflation

A period of

inflation is

characterized by

a general

increase in

prices and a fall

in the

purchasing

power of money

DEMAND-SIDE

EFFECTS

How

do w

e fi

x the

pro

ble

m?

Here

are

som

e so

lutio

ns!

Recession

(expansionary

policies)

Government

reduces

taxing

Government

increases

spending

Inflation

(contractionary

policies)

Government

increases

taxing

Government

decreases

spending

Gra

phs o

f Eff

ects

of Po

licies

Recessionary

Gap

Inflationary

Gap

SUPPLY-SIDE

EFFECTS

STA

GFLA

TIO

NGraph

Occurs

whenever

the

aggregate

supply curve

shifts to the

left

Solutions

Supply-side

economics is an

attempt to cure

stagflation

Economists

recommend special

tax policies and less

government

regulations

Fiscal policy alone is

not enough to solve

this problem so the

FED implements

monetary policies as

well which is known

as policy mixing

FORMULAS

Calcu

latin

g th

e

Eff

ects

Spending

Multiplier

A measure of the

change in aggregate

consumption which

occurs when one

person’s consumption

affects another’s and so

on

Tax Multiplier

A measure of the

change in aggregate

production caused

by changes in

government taxes

SM=

1/(MPS+MPI)

TM=

-(MPC-MPI)/(MPS+MPI

)

COMPLICATIONS

Reasons why policies can be

ineffective

Cro

wdin

g O

ut

This occurs when the gov.

increases spending in a

recession that causes

them to run a deficit The result of this is the

gov. borrowing money

from banks and banks

increasing interest rates

Ironically, increased interest rates, causes

people to spend less so

this cancels out the effect

of increased gov. spending

Role

of

Exp

ecta

tions

Theory

Based on the

idea that

households and

businesses take

all available info

into account

when making

decisions

Implies that

fiscal policy will

be ineffective at

changing of

output

Example

The gov. uses

expansionary policy

People understand

that gov will deficit

spend

Deficit

spending=higher

prices in the future

Less people work and

less products are

produced now in

anticipation of higher

wages and prices

Unfortunately, this

cancels out the effect

of the implemented

policies

Types o

f

Inflatio

n

Demand-Pull

“too many dollars chasing

too few goods”

For example, an economy

reaches its maximum

production level and the

supply of goods and

services doesn’t meet the

demand of consumers.

The costs go up due to an

increase in demand and a

shortage in supply.

Cost-Push

Increases in production

costs that cause firms to

raise prices to avoid

losses

An example is when

workers demand an

increase in wages.

When this occurs, the

businesses need to raise

the prices of their goods

and services to diminish

any loss in profit.

Phillip’s curve

The P

hillip

s

Curve

The Phillips

tradeoff is

the inverse

relationship

between

inflation and

unemployme

nt.

The Phillips

Curve

provides a

visual for this

concept

The P

hillip

s

Curve

Short RunLong Run

In the short run, there is an

inverse relationship

between inflation rates and

unemployment rates

In the long run,

unemployment stays the

same and inflation is the

only factor that changes

THE END