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Fiscal Policy

Fiscal Policy. The use of governments power to tax and spend to regulate economic activity. Business Cycle ups and downs:. Rapid expansions AD > AS and prices rise create inflation. Slowdowns create contractions (recessions) AD < AS Unemployment results. Aggregate Demand.

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Fiscal Policy

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  1. Fiscal Policy The use of governments power to tax and spend to regulate economic activity

  2. Business Cycle ups and downs: Rapid expansions AD > AS and prices rise create inflation Slowdowns create contractions (recessions) AD < AS Unemployment results

  3. Aggregate Demand AD= C + I + G + XN

  4. Government involvement: Government spending Function of the national budget http://www.youtube.com/watch?v=fWu8o-ZzUNs Requires approval of President and Congress Popularity and politics Automatic stabilizers—income taxes, unemployment benefits, welfare

  5. Taxes Progressive Taxes—the more you earn, the more you pay Income taxes Taxable income bracket tax $1000 10% $100 $10000 20% $2000 $100,000 50% $50,000

  6. Taxes Regressive Taxes—take a larger part of lower incomes than higher incomes $75 fee for a vehicle license in Wisconsin Income fee % of income $1000 $75 7.5% $10,000 $75 .75% $100,000 $75 .075%

  7. Taxes Proportional—pay the same percentage of income 5.5% sales tax Income spent tax tax paid % of income $50 5.5% $2.75 .275% of $1000 $100 5.5% $5.50 .055%of $10,000 $500 5.5% $27.50 .0275%of$100,000

  8. Taxes Proportional Tax or flat tax Income tax of 20% for all taxable income $1000 pays $200 in taxes $10,000 pays $2000 in taxes $100,000 pays $20,000 in taxes

  9. If we don’t collect enough in taxes… The government will borrow money to cover our obligations. DEFICIT= spend more than revenue yearly DEBT=accumulated deficits over time Treasury Bonds, Treasury Bills sold on the open market http://www.brillig.com/debt_clock/faq.html

  10. Federal Debt

  11. How can we reduce our debt? What can we do? Reduce spending? Raise revenue? Provide less benefits?

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