Chapter16:
Fiscal & Monetary Policy
Government should play an active
role in the economy
Fiscal
policy
Monetary
policy
Learning Objectives
1. Analyze the contractionary fiscal
policy.
Is high inflation good for the
economy??
Contractionary Fiscal Policy
Contractionary fiscal policy
Fiscal Restraint
1. Why?
Classwork 5 min
2. What is the government goal in this situation?
3. What are the fiscal policy options should be considered by the
government?
4. What are the effects on the Economic indicators?(GDP,
Aggregate demand, income level, consumption, standard of living, price level..)
5. What are the effects on the government budget?
Contractionary fiscal policy
Fiscal Restraint
Why?
When the economy is growing too fast rate of growth causing
an excessive inflation
Contractionary fiscal policy
Fiscal Restraint
Why?
When the economy is growing too fast rate of growth causing an excessive
inflation
Goal: Decrease aggregate demand, decrease real GDP, decrease price
level
Fiscal Options: * Decrease Government spending
* increase taxes:
Effects on the Economic indicators:
level,
AD, RGDP, UR,
consumption level , standard of living, Price level
Effects of the Government budget?
Budget Surplus
income
Plenary
Scenarios
Scenario
1. National
unemployment
rate rises to
12%
2. Inflation is
strong at a rate
of 14% /year
Expansionar
y/
Contraction
ary
Objective
for
Aggregate
demand
Action on
taxes
Action on
governmen
t
expenditur
e
Effect
on
nation
al
Debts
Effect
on
GOV
budge
t
Plenary
1. Fiscal policy is a change in:
a. Government expenditures & taxes.
b. Businesses expenditures & taxes.
2. Expansionary fiscal policy is done by government when:
a. Unemployment is high & GDP is low.
b. Unemployment is low & GDP is high.
3. The result of the expansionary fiscal policy is:
a. A budget deficit.
b. A budget surplus