Fiscal Policy Notes
A Review of Reading IP
Fiscal Policy Key Concepts
1. What does fiscal mean?
Government spending, debt, revenue
2. Define fiscal policy
Federal government using
A) Government Spending
B) Taxation
to affect the economy
Fiscal Policy Key Concepts
3. What are the two goals of FP?
A) Increase aggregate demand
B) Fight inflation
Challenge Question!!!
1. What institution is responsible for fiscal
policy?
A)
B)
C)
D)
The Federal Reserve
The Government
Commercial Banks
Economic Advisory Organizations
Expansionary vs. Contractionary
• Expansionary
– Make larger
• Contractionary
– Make smaller/tighter
Expansionary FP
• Expansionary= expand the amount of money
in the economy
4. When will the economy use expansionary FP?
When the economy slows (recession)
What is expansionary FP’s plan?
– Plan to expand the amount of $ in the economy
• This will increase aggregate demand
– Increased spending will stimulate the economy
Contractionary FP
• Contractionary= reduce the amount of money in
the economy
5. When will the economy use contractionary FP?
During Inflation
What is contractionary FP’s plan?
– Plan to reduce the amount of $ in the economy
• This will decrease aggregate demand
– Decreased spending will stop prices from getting
too high
Challenge Question!!
• True or False: In a recession, it is a good idea
to contract the amount of money in the
economy.
Discretionary FP
6. What is discretionary FP?
Actions taken by the
government by choice to correct
economic instability
7. What type of active government
responses might be used in
discretionary FP?
A) Changing taxes
B) Changing government
spending
Automatic Stabilizers
8. What are automatic stabilizers?
Features of fiscal policy that automatically stabilize the
economy (such as public transfer payments)
9. What are examples of public transfer payments?
Unemployment compensation, food stamps
Automatic Stabilizers
10. How do public transfer payments stabilize the economy in a
recession?
– More people qualify for government benefits like food stamps in a recession.
– They get more money to spend from the government
• This increases aggregate demand and helps the economy
11. How do public transfer payments stabilize the economy when it is
growing too fast (inflationary period)?
– Economy is doing well so less people qualify for benefits like food stamps
– This takes $ out of the economy, which reduces aggregate demand, and keeps
prices from rising
Automatic Stabilizers
12. How do progressive income taxes act as automatic stabilizers
during prosperous times?
More people get paid, the more taxes they pay. Taxes prevent
some of this increased income from entering the economy,
which keeps inflation in check.
13. How do progressive income taxes act as automatic stabilizers
during a recession
People make less, taxes less, reduced impact of recession
Challenge Question!!!
True or False: Automatic stabilizers are part of
discretionary fiscal policy.
The Purpose of Fiscal Policy
14. What is expansionary fiscal policy designed to do?
Stimulate a weak economy to grow
15. What is contractionary fiscal policy designed to do?
Slow the economy down to control inflation
Policy 1: Expansionary Fiscal Policy
16. In expansionary fiscal policy, does the government want to
increase or decrease aggregate demand?
Increase AD
17. Expansionary FP ____________ government spending and
______________ taxes
Expansionary Fiscal Policy
18. What example of increased government spending does the
book use?
Increased highway spending (build more roads)
19. What taxes might be lowered in expansionary fiscal policy?
Why?
Income and corporate taxes. So people will spend more
and increase aggregate demand.
Policy 2: Contractionary Fiscal Policy
20. In contractionary FP, does the government want to increase
or decrease aggregate demand?
Decrease AD
Contractionary Fiscal Policy
21. What is it called when the economy is growing too rapidly
and aggregate demand is increasing faster than supply?
Demand-pull inflation
22. Contractionary FP ____________ government spending and
______________ taxes
23. What example does the book give of cuts in government
spending?
Cuts in highway construction, education, healthcare
Challenge Question
Which of the following is correct?
A) Expansionary FP such as decreased government
spending is used in periods of inflation
B) Expansionary FP such as tax cuts are used in
periods of recession
C) Contractionary FP such as tax cuts are used in
periods of recession
D) Contractionary FP such as increased government
spending is used in periods of recession
Limitations of FP- Policy Lags
24. Describe the limitations of fiscal policy related to
policy lags.
Lags behind economic issues. Takes congress
months to decide on a course of action.
Limitations of FP- Political Issues
25. Describe the limitations of fiscal policy related to political
issues.
The President may not follow the advice of the Council of
Economics advisors due to political issues (like reelection).
Challenge Questions!!!!
1. Despite what economic advisors say, would a president who is up for reelection be
more inclined to increase taxes or cut taxes?
Cut taxes
2. Expansionary fiscal policy involves the use of increased government spending to
change economic conditions. In general, do you think democrats or republicans would
be more supportive of this type of policy?
Democrats
3. Contractionary fiscal policy involves the use of decreased government spending to
change the economy. In general, do you think democrats or republicans would be more
supportive of this type of policy?
Republicans