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 Investopedia video clip