Fiscal Policy
Fiscal policy is changes government makes in spending
or taxation to achieve particular economic goals.
Fiscal Policy
President and Congress
 Responsible for influencing the economy through

taxing
spending
policies of
and
Fiscal Policy And
Invisible Hand
 Adam
Smith believed individuals
maximizing their own good through
trade and entrepreneurship benefits
society as a whole
government
intervention in the
economy isn't needed
the
invisible hand is the best guide for
the economy
Fiscal Policy History
 Adam
Smith taught us to rely on the
“Invisible hand” means economic
decisions are best left to the market
 Things
chugged along nicely until 1929
and the Great Depression
Fiscal Policy History
 During
the Great Depression, British
economist John Maynard Keynes said,
“In the long run we are all dead.”
 The
government should use their power to
tax and spend to stimulate the economy
and lessen suffering.
Keynesian Economic Theory
 States
that governments can influence
macroeconomic productivity levels by
increasing government
spending and decreasing taxes
when times are bad
OR
 Decreasing
government spending and
Increasing taxes when times are good.
Fiscal Policy History
Continued
 The
goal of Keynesian Theory during
a depression?
 curb
inflation (keep it between 2-3%)
 increase
employment
 maintain
a healthy value of money.
 When
inflation is too strong, the
economy may need a slowdown
Definitions
'Expansionary Fiscal Policy'

An increase in
government spending
Or

A reduction in taxes
EOC study guide
Macroeconomics #12
Definitions
'Contractionary Fiscal Policy’

EOC study guide
Macroeconomics #13
A decrease in government
spending
Or

An increase in taxes
Fiscal Policy

GDP = C + I + G + Xn

Fiscal policy is the government’s use of G and
T to affect aggregate demand in order to
stabilize the economy
Fiscal Policy
Problem/Solution

Unemployment is extremely high

What can Congress do?

Expansionary Fiscal Policy:

Congress could increase government spending

Lower taxes
Fiscal Policy
Problem/Solution

The U.S. has high inflation rates

What can Congress do?

Contractionary Fiscal Policy:

Congress should decrease government spending

Congress could raise taxes on businesses and
individuals
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