Intro to Fiscal Policy
AP Macroeconomics
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Where we came from…
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As the price level increases,
there’s a push for higher
nominal wages to
compensate for the higher
price level.
The increase in nominal
wages will shift the
aggregate supply curve to
the left (one of those
determinants).
Down the road, the
economy will return to the
potential output level of Y*,
but when it does it will be at
a higher price level, P2.
Visual 3.13, Unit 3 Macroeconomics, National Council on
Economic Education, http://apeconomics.ncee.net
Where are we going?
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In this lesson, we’ll
learn about the two
primary fiscal policy
tools of government,
and their affect on real
GDP.
We’ll practice
manipulating the tools
of fiscal policy and
analyzing scenarios to
determine appropriate
fiscal policy.
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Fiscal Policy…what is it?
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1)
2)
Fiscal policy is one of the
two demand management
policies available to policy
makers.
There are two
discretionary fiscal policy
tools:
Government spending
Taxes
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Let’s examine government spending…
Government spending affects the economy
directly by increasing the demand for goods
and services. As soon as government
spending increases, the multiplier process is
initiated.
This results in greater increase in total
spending than what the government initially
spent.
This increases aggregate demand, which shifts
the AD curve to the right. Increases price
level and real GDP.
Conjecture…
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What would a decrease in government
spending do? Take a moment to think…
What about the
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nd
2
tool…TAXES?
Changes in taxes do not
directly affect GDP.
Changes in taxes affect
disposable income.
Increase taxes  decrease
disposable income 
decrease consumption
and investment 
decrease in real GDP by
more than the initial tax
increase
Side note: This change is felt indirectly
through changes in consumption spending
and investment spending.
When taxes are increased, the multiplier
process is initiated, disposable income is
decreased.
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And now…
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Some resources:
http://www.reffonomics.com/
Morton workbook Activity 30
Works Cited
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Economics of Seinfeld.
http://yadayadayadaecon.com/clip/46/
Krugman, Paul, and Robin Wells. Krugman’s
Economics for AP. New York: Worth
Publishers.
Morton, John S. and Rae Jean B. Goodman.
Advanced Placement Economics: Teacher
Resource Manual. 3rd ed. New York: National
Council on Economic Education, 2003. Print.
Reffonomics. www.reffonomics.com.