Fiscal Policy

​Economic Policies

How do Countries stabilize and control economies?

​The first economic policy was the idea of "self correction."

Father of Economics Adam Smith (in his book Wealth of Nations) describe the classical theory that the economy will eventually "fix" itself WITHOUT ANY INVOLVEMENT. ​ (meaning we will exit & enter recessions & expansions on its own)

​The BIGGEST issue with self correction is that it takes TOO LONG! (it can take several years for an economy to fix itself without help)

Open Ended

An economy self correcting means....

​So when an economy is having problems & it is taking too long to self correct in the US we have 2 types of policies to help. We will learn about the first one:

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Fiscal Policy

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​Fiscal Policy

Whenever the economy is performing poorly, people tend to look for solutions from their elected representatives in Washington. They may look for changes in fiscal policy—the federal government’s attempt to influence or stabilize the economy through taxing and government spending. 

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Open Ended

What are the two tools the US government uses to help "fix" an economy?

​FIRST COLUMNOF NOTES: Summarize

Multiple Choice

Government decisions that are intended to positively impact the United States' economy:

• Monetary Policy

• Economic Policies

• Fiscal Policy

• Scarcity Decisions

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2nd row, 1st column of Notes

Multiple Select

Who makes the fiscal policy for the US Economy? (select two)

• President

• Federal Reserve

• State Governments

• Congress

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Open Ended

The federal budget is a just a large scale example of budgeting that we discussed yesterday. When we create our budget, we have to consider our income and expenses. What are the two things the government must consider when creating their budget?

​NO NOTES

Multiple Choice

Which of the following represents a fiscal year?

• any 12 month period

• January 1st- December 31st only

​NOTES: 3rd row

Poll

Which Political party opinion on Expansionary Fiscal Policy do you agree with.

• Republican (CUT TAXES)

• Democrat (MORE SPENDING)

• Undecided

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In summary:

Expansionary Policies are put into place when the economy is not doing well (high unemployment, low real GDP, and deflation). If there is not enough money flowing, the government will put an expansionary policy into play which allows for increased spending. This starts a chain reaction: increased spending --> increased producing ---> increased need for employment.

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Expansionary Policies are typically implemented during the contraction phase of the business cycle.​

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In summary:

Expansionary FISCAL Policies goal is to EXPAND or GROW the economy.

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Open Ended

The onset of Covid-19 caused a recession in the US economy. What did the US government do in order to stimulate the economy and generate spending?

Open Ended

We are currently in a high inflation period (normal inflation is 2%, at the moment the US is at 3%). What can our Congress do to help slow down our economy?

Open Ended

Who favors contractionary policies?

In Summary

Contractionary Policies are put into place in order to reduce inflation in the economy. If spending trends are rapidly increasing, a contractionary policy may be implemented to stabilize rates and prevent an economic downturn. It is not ideal, however it is necessary sometimes. With contractionary policy comes increased taxation.

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Contractionary policies are typically implemented during ​the expansion phase of the business cycle.

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In Summary

Contractionary Policies goal is to SHRINK the economy

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Review

Multiple Choice

The economy is experiencing a recession.

Expansionary Policy or Contractionary Policy?

• Expansionary Policy

• Contractionary Policy

Multiple Choice

The economy is experiencing inflation.

Expansionary Policy or Contractionary Policy?

• Expansionary Policy

• Contractionary Policy

Multiple Choice

The unemployment rate is over 12%.

Expansionary Policy or Contractionary Policy?

• Expansionary Policy

• Contractionary Policy

Multiple Choice

Inflation is at 27%

Expansionary Policy or Contractionary Policy?

• Expansionary Policy

• Contractionary Policy

Multiple Choice

The Government cuts business taxes

Is this Expansionary Fiscal Policy or Contractionary Fiscal Policy?

• Expansionary Policy

• Contractionary Policy

Multiple Choice

The government increases spending

Is this Expansionary Fiscal Policy or Contractionary Fiscal Policy?

• Expansionary Policy

• Contractionary Policy

Multiple Choice

The Government increases personal income tax

Is this Expansionary Fiscal Policy or Contractionary Fiscal Policy?

• Expansionary Policy

• Contractionary Policy

Multiple Choice

An example of a contractionary fiscal policy would be if:

• taxes were cut

• the government bailed out GM

• the Fed decrease the fed funds rate

• taxes were increased

Multiple Choice

An example of expansionary fiscal policy would be

• cutting taxes.

• cutting government spending.

• cutting production of consumer goods.

• cutting prices of consumer goods.

Multiple Choice

The Federal government is concerned that economic growth is too high, that it is unsustainable, and that inflation is resulting. Which of the following fiscal policies might be enacted to reduce inflation?

• Increasing taxation

• Open market sales

• decreasing taxation

• Increasing government spending

Multiple Choice

Fiscal Policy is the means by which the government keeps the economy stable through taxes and programs provided to the people.

• True

• False

Multiple Choice

If the unemployment rate is rising and GDP is falling, the fiscal policy action that the federal government should MOST likely follow is 

• decreasing taxes.
• decreasing spending.
• decreasing the money supply.
• decreasing the reserve requirement.

Multiple Choice

An example of expansionary fiscal policy would be

• cutting taxes.
• cutting government spending.
• cutting production of consumer goods.
• cutting prices of consumer goods.

Multiple Choice

Which of the following are responsible for making fiscal policy decision? 

• The President and Congress
• The Federal Reserve System
• The National Council of Economic Advisors
• The commerce Department

Multiple Choice

During a contraction / recession, the Federal Government should use

• an expansionary fiscal policy

• a contractionary fiscal policy

Multiple Select

The two "tools" of Fiscal Policy are: (Must pick 2!)

• the power to tax

• the power to spend

• the power to borrow money

• the power to print money