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Fiscal Policy

Fiscal Policy. Makin' Lil Scrappy happy, one day at a time. So, what is Fiscal Policy ? The use of government spending and revenue collection to influence (the demand side of) the economy. Chris is very excited to rock out with some fiscal policy jams!!.

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Fiscal Policy

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  1. Fiscal Policy Makin' Lil Scrappy happy, one day at a time

  2. So, what is Fiscal Policy? • The use of government spending and revenue collection to influence (the demand side of) the economy. Chris is very excited to rock out with some fiscal policy jams!!

  3. So, it all begins with our Federal Budget. (See chart to the left, no your other left) Basically, it’s the amount of money given to different areas of the government in a given fiscal year. (Oct 1st – Sept. 30th) It takes a really long time to prepare a budget (18 months) and all budget items must be passed by Congress as bills. Yes, it’s all very interesting; budget, Medicare, transmutation, what else is on? (That’s “transportation” Peter)

  4. OK, so why does it matter? What does Fiscal Policy do? Fiscal Policy has to do with the idea that by changing government spending on programs and how much it taxes the people, it can stabilize the macroeconomy and affect output. Please tell me these rogue economists remember that there are two kinds of Fiscal Policy… and Meg, shouldn’t you care more about how cool you aren’t?

  5. Yes Peter, more spending means more stuff which means prices go up (see law of supply) and causes unemployment to drop. Less taxes means people have more money to spend which forces Aggregate Demand to increase, ultimately increasing output. (GDP) The first kind is Expansionary Policy right? That’s where the Government increases its spending on programs, buys more stuff, and cuts peoples taxes so that the economy (GDP) will grow. Cool, so can I carry the big knife thing now? No. Mr. Martinez, show them the graph.

  6. The second type is called Contractionary Policy. It’s where the government decreases spending and increases taxes in order to reduce the growth of the economy (GDP). I thought having a big and strong economy is a good thing? HOO-AH! U.S.A.! U.S.A.! Yes, that’s all good and well until supply can’t meet demand and producers raise prices which causes inflation Joe…you think that’s Hoo-Ah too? What about when your money won’t buy you protein shakes huh?

  7. Jackpot. Great, now that I understand Fiscal Policy and the President wants to cut taxes, I can sell Meg. You better stop right there pal! You know, Fiscal Policy is a great tool, but there are some limits with its effectiveness.

  8. THAT’S RIGHT!! Difficulty in changing spending levels due to entitlements Delayed results Predicting the future Political Pressure and Coordination All make Fiscal Policy really hard to use!! Yeah- heah!!

  9. So how does Fiscal Policy affect the average family?? Ready to Rumble? Let’s do this… Actually Peter, it all began with 2 economists, Adam Smith and John Maynard Keynes SMITH KEYNES

  10. You see, Smith was a Classical Economist. He thought that if you leave things alone, the market would take care of itself. So we did, and we ended up in a Great Depression. But then came the first Keynesian Economist, John Maynard Keynes (go figure.) He argued that if we want a solid market system, that we had to get involved down to the nitty gritty. Giggity goo! Keynes said that if the government “jump-starts” the economy by spending and cutting taxes so people will spend too, then we would get out of the Depression. This is called Demand-Side Economics.

  11. One reason that Fiscal Policy is so powerful has to do with the Multiplier Effect. Basically, that every one dollar spent by the government becomes more than one dollar in the economy. For example, lets say the gov’t. invests 10 million dollars on new goods. Those companies will now have 10 million dollars, but they will also use some of it to pay for workers’ salaries. Company #1 The 8 million dollars (for salaries) will now be given to the workers who (like the gov’t) will go and spend some of their money on stuff from company #2. Company #2 The 6 million dollars (for salaries) will now be given to the workers who (like the gov’t and Company #1) will go and spend some of their money on stuff from company #3, and so on… So that original $10 million investment turns into much more money for the economy in the long run, and when all that money adds up…

  12. Notice how, as time progresses, the government has been much more adept at stabilizing the economy! The other cool thing is that if set up right, Fiscal Policy’s stabilizers (as percentages) can be automatic so we can have more DDR time!

  13. And so Peter, you now know wield the power of Fiscal Policy. Go forth my young padawan. Make them dolla dolla bills ya'll! Awesome!

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