Do now in pairs

1. D:\Teaching\Economics\Year 12 Eco\Government Policies\Inpact of Inflationary Policies on Growth and Trade.doc

2. Do now in pairs In pairs Classify each of the events on the cards under the following headings • The business cycle • Natural disaster • Man-made disaster • Change in government policy • Overseas trade Now classify each event according to if it effects AS or AD initially Now classify each event according to weather it will increase or decrease real GDP

3. SLO: Understand and explain the impact of fiscal policy on growth. • By the end of this unit you will know: • What is fiscal policy? • The governments operating balance • Fiscal policy and the business cycle

4. Government Economic Policies

5. Fiscal Policy Fiscal Policy : Taxing and spending by the government to influence the level of economic activity Taxation Spending

6. Taxation • Any tax cut by the government will stimulate the economy. • Direct tax cuts means consumers have more disposable income leading to an increase in consumption spending. - This could lead to inflationary pressures

7. Reduction in direct taxes Increased disposable incomes Increased demand for goods and services S P’ Pe D’ D Qe Q’ Increased production Increased demand for labour So output has gone up but so to have prices. If enough prices go up the we can expect employees to demand higher wages. Higher wages mean costs of production increases which will push supply to the left.

8. Taxation S’ • Output has fallen and prices have risen yet again. • Stagflation= economy experiencing no growth while experiencing inflation • Also risk a decrease in exports as NZ goods become relatively more expensive. S P’ Pe D Q’ Qe GDP = C + I + G + (X-M) Income taxes

9. Government Spending • Expenditures by the government • Governments spend money in the economy in a number of ways • Education • Health • Transfer payments • Army • Governments should spend money to stimulate the economy. E.g. • Increased welfare spending • Funding major projects like highways or hospitals • Increased spending on education • Funding more research and development

10. Governments Operating Balance • Tax- leakage from circular flow • Spending- injection into circular flow • When tax=spending there is no increase in GDP in terms of G (Balanced Budget). Operating Balance is zero

11. Governments Operating Balance • When tax > spending Govt. is running a budget surplus… • called contractionary fiscal policy. • When tax < spending… Govt. is running a budget deficit… called expansionary fiscal policy. • Govt. uses expansionary fiscal policy when spending is down (demand) to keep growth in positives.

12. Examples of expansionary Fiscal Policy • Goal of expansionary fiscal policy is to stimulate the economy and decrease the unemployment rate • Government spending on education • Government spending on regional development • Government Spending on Investment and Infrastructure • e.g highway construction • Taxation

13. Fiscal Policy • History of fiscal policies • Often used expansionary policies • 1930s govt acted to drag the economy out of depression • Think big projects of 1970s and 1980s meant to reduce NZ dependence on overseas oil and create 400,000 jobs. Pushed up govt spending and did not create as many jobs as hoped. • Fiscal Responsibility Act 1994: aimed at running budget surpluses therefore CONTRACTIONARY in nature (enables debt to be paid off)

14. Activities • Text book page 199 exercise 5.14 • Then • Workbook page 152