Fiscal PolicyFiscal Policy

DefinitionDefinition

Attempts by Congress to control the Attempts by Congress to control the economy through government economy through government spending and/or tax policiesspending and/or tax policies

Two types of fiscal policyTwo types of fiscal policy

Expansionary – increased spending Expansionary – increased spending or decreased taxesor decreased taxes

Contractionary – decreased spending Contractionary – decreased spending or increased taxesor increased taxes

Type of fiscal Type of fiscal policypolicy

Changes in Changes in government government spendingspending

Changes in Changes in taxestaxes

ExpansionaryExpansionary IncreaseIncrease DecreaseDecrease

ContractionarContractionaryy

DecreaseDecrease IncreaseIncrease

Tax policiesTax policies

After-tax or disposable income = After-tax or disposable income = income left after taxes are paidincome left after taxes are paid

Lowering taxes = increased after-tax Lowering taxes = increased after-tax spendingspending

Raising taxes = decreased after-tax Raising taxes = decreased after-tax spendingspending

Policies can be targetedPolicies can be targeted

Could increase $ to education. Could increase $ to education. Benefits middle class.Benefits middle class.

Could create jobs for low income Could create jobs for low income earners. Benefits poor.earners. Benefits poor.

Could decrease tax rate for the Could decrease tax rate for the wealthy. Benefits the wealthy.wealthy. Benefits the wealthy.

Can also target to either demand-Can also target to either demand-side or supply-side of the economy.side or supply-side of the economy.

Impacts of expansionary policyImpacts of expansionary policy

Can stimulate spending, which Can stimulate spending, which stimulates production (increases stimulates production (increases GDP), reduces unemployment.GDP), reduces unemployment.

If demand-pull inflation is occurring, If demand-pull inflation is occurring, will make it worse.will make it worse.

If non-labor cost-push inflation is If non-labor cost-push inflation is occurring, will not make it worse.occurring, will not make it worse.

Impacts of contractionary policyImpacts of contractionary policy

Effective when demand-pull inflation Effective when demand-pull inflation is presentis present

If in recession, it makes it worseIf in recession, it makes it worse If prices are rising because of non-If prices are rising because of non-

labor cost-push factors, it will hurt labor cost-push factors, it will hurt the economy and not reduce pricesthe economy and not reduce prices