Fiscal Policy

1. Fiscal Policy The government helping stabilize the economy through taxing, spending, and borrowing.

2. Four Flaps History Tools Taxes Inflation/Recession

3. 1st Flap - HISTORY Fiscal policy was born in 1932. What economic problem was occurring?

4. Before 1932 • Classical Economics • Adam Smith • No government involvement in the economy • Low debt/taxes • No assistance programs • Government doesn’t provide economic stability.

5. One good thing One Bad thing

6. After 1932 • FDR elected • John Maynard Keynes • Government should spend money to promote growth and stability during downturns. • FISCAL POLICY BORN – government taxing, spending, and borrowing programs to promote economic stability • Government assistance • Possibility of higher debt/taxes

7. One good One bad

8. Keynesian = Fiscal Policy • Fiscal Policy – government’s taxing, spending, borrowing policies to stabilize the economy • Discretionary – Congressional changes in Fiscal Policy

9. Discretionary FP Changes made to Fiscal Policy by Congress

11. POSTER Choose either Classical or Keynesian to support. Create a poster supporting your theory of choice. It must include: • Your theory name • A visual • A slogan

12. 2nd flap - TOOLS

13. #1Tool • Spending • Federal budget – income versus your expenses listed • Balanced budget – income = expenses • Budget surplus – income is greater than expenses • budget deficit– income is less than expenses • Deficit spending – borrowing money to cover expenses • National debt – a result of deficit spending. Accumulation of debt • Most budgets are set on a Fiscal Year – an accounting year for businesses.

14. #2 tool • Taxes – government income

15. #3 tool • Borrowing – to promote growth, the government can borrow money to fund programs that will stimulate the economy.

16. #4 tool • Automatic stabilizers • Government programs that were created to automatically fight inflation/recession.

17. #5 • Supply side economics – using businesses to fix the economy • Demand side economics – using consumers to fix the economy

18. 3rd Flap – “taxes” • A tax is a payment to the government. Our income is taxed and we have to pay a sales tax on purchases at the store.

19. 3 types of taxes • Progressive tax • As income increases, so does the amount of tax that we have to pay. • Example – income tax

20. Proportional Tax • A tax that is the same percentage for all • Example – sales tax and an excise tax. An excise tax (sin tax) is levied on gas, tobacco, alcohol, and the lottery. • Fair tax is a hot topic! • Fairtax.org

21. Regressive Tax • A tax that hurts the lower income consumer because it is harder for them to pay it due to their low amount of disposable income. • Example, sales tax and excise tax

22. Change in tax structure movement… Some people do not like the current income tax. Therefore, an idea was created as a substitute for the income tax. It is a national based sales tax which would eliminate the income tax. Look at http://fairtax.org

23. Writing assignment • After going over tax information, do you believe that the tax structure should stay the same or change? Do you believe we should keep the income tax (progressive) or eliminate it and only have a nation wide sales tax? • This must be at least 7 sentences. You must have three reasons to support your opinion.

24. 4th Flap • Inflation and Recessions

25. Fiscal policy Inflation Recession too much money not enough lower AD Increase AD GDP, CPI higher GDP, CPI low

26. Inflation Restrictive Fiscal Policy Taxes Spending Borrowing Automatic stabilizers back off

27. Recession Expansionary Fiscal Policy Taxes Spending Borrowing Automatic stabilizers increase

28. Review FED • Name one tool the FED would use to fight recession and tell how they would use it. • Name one tool the FED would use to fight inflation and tell how they would use it.