1 / 22

Fiscal Policy

Explore the role of fiscal policy in managing the economy, focusing on controlling inflation, reducing unemployment, and promoting economic growth. Learn about the different components of fiscal policy and how it can be used to combat recession and inflation.

gswan
Download Presentation

Fiscal Policy

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Fiscal Policy • Fiscal Policy - Government effort to control the economy and maintain stable prices, full employment, and economic growth. Fiscal Policy deals with adjusting government spending (G) and tax revenue (T) in order to achieve these goals. Fiscal Policy is aimed at manipulating the federal budget. • Macro Economics = Looking how the United States as a country deals with financial circumstances.

  2. Fiscal Policy and Graphing NotesThree Macroeconomic Goals:-Inflation @ 3-4% or less-Unemployment @ 5% or less-Economic Growth @ 3-4 % or more

  3. Problem #1-Inflation • Too much money in the money supply • The value of the dollar goes down • Prices rise out of control • “purchasing power” declines – you get less for your dollar • Inflation usually goes up at a rate of 3% a year • GDP- Gross Domestic Product rises

  4. Problem #2 -Recession • High Unemployment • Low economic growth • People are not spending / in turn little growth in businesses / little revenue forces businesses to fire employees! • GDP – Gross domestic Product decreases

  5. Three Possible Results of Fiscal Policy • Budget deficit (G>T) – ex. 4 trillion>3 trillion • Budget surplus (G<T) –ex. 3 trillion<4 trillion • Balanced Budget (G=T) –ex. 3 trillion=3 trillion

  6. Two types of Fiscal Policy : 1. Contractionary - used to fight inflation (problem #1) • AD and GDP decreases 2. Expansionary – used to fight recessions(problem #2) • AD and GDP Increases

  7. 4 Components of AD • Aggregate Demand / GDP– $ value of all goods and services produced and sold in 1 year. • 17 trillion per year - 4 Components of AD 1. Consumer Spending 2. Investment Spending 3. Government Spending 4. Net Exports (Exports – Imports)

  8. Expansionary Fiscal Policy • T ____ & G ____ = AD ____ Lower Taxes and Raise Government Spending = What happens to the Aggregate Demand?

  9. Contractionary Fiscal Policy • T ____ & G ____ = AD _____ • Raise taxes and lower Government Spending = What will happen to Aggregate Demand?

  10. Recession - GRAPH IT! AS During Recession, Expansionary Fiscal Policy will Increase AD! PL2 PL1 AD2 AD1 GDP1 GDP2 Output / Employment

  11. You Graph It! During Inflation, Contractionary Fiscal Policy will decrease AD!

  12. THE BUSINESS CYCLE The national economy fluctuates resulting in periods of boom and bust. Inflation Unemployment Full employment A Recession is 6 month period of decline in Real GDP. (If really bad…then depression)

  13. Unemployment

  14. 3 Types of Unemployment #1. Frictional Unemployment • “Temporarily unemployed” or being between jobs. • Individuals are qualified workers with transferable skills but they aren’t working. Examples: • High school or college graduates looking for jobs. • Individuals that were fired and are looking for a better job. You’re Fired! 15

  15. 3 Types of Unemployment Seasonal Unemployment • This is a specific type of frictional unemployment which is due to time of year and the nature of the job. • These jobs will come back Examples: • Professional Santa Clause Impersonators • Construction workers in Michigan 16

  16. 3 Types of Unemployment #2. Structural Unemployment • Changes in the structure of the labor force make some skills obsolete. • Workers DO NOT have transferable skills and these jobs will never come back. • Workers must learn new skills to get a job. • The permanent loss of these jobs is called “creative destruction.” (Why?) Examples: • VCR repairmen • Carriage makers 17

  17. 3 Types of Unemployment Technological Unemployment • Type of structural unemployment where automation and machinery replace workers causing unemployment Examples: • Auto assemblers fired as robots take over production • Producers of Capital Goods (tractors) fire assemblers 18

  18. 3 Types of Unemployment #3 Cyclical Unemployment • Unemployment that results from economic downturns (recessions). • As demand for goods and services falls, demand for labor falls and workers are fired. Examples: • Steel workers laid off during recessions. • Restaurant owners fire waiters after months of poor sales due to recession. This sucks! 19

  19. What is Unemployment? # unemployed Unemployment rate x = 100 # in labor force The Unemployment rate The percent of people in the labor force who want a job but are not working. Who is in the Labor Force? • Above 16 years old • Able and willing to work • Not institutionalized (jails, hospitals) • Not in military, in school full time, or retired Why is a stay at home mom not unemployed? 20

  20. The Natural Rate of Unemployment Two of the of the three types of unemployment are unavoidable: • Frictional unemployment • Structural unemployment • Together they make up the natural rate of unemployment (NRU). We are at full employment if we have only the natural rate of unemployment. • This is the normal amount of unemployment that we SHOULD have. • The number of jobs seekers equals the number of jobs vacancies. 21

  21. The Natural Rate of Unemployment Full employment means NO Cyclical unemployment! Economists generally agree that an unemployment rate of around 4 to 6 % is full employment. 4-6% Unemployment = NRU Currently the U.S. is at ____4___% Teenage Unemployment is at __11____% 22

More Related