fiscal policy
description
Transcript of fiscal policy
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fiscal policyDaniel Begazo Lily Zhang
Sabrina Tan
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Wha
t is F
iscal
Po
licy?
Fiscal policy refers to the government’s response to inflation and/or recession in an economy
They accomplish this through implementing contractionary or expansionary policies
The tools they use are spending and taxing
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Economic Issues
Recession
A recession is a
period of
temporary
economic decline
characterized by
a drop in GDP
and employment
Inflation
A period of
inflation is
characterized by
a general
increase in prices
and a fall in the
purchasing
power of money
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DEMAND-SIDE EFFECTS
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How do we fix the
problem?
Here are some solutions!
Recession
(expansionary
policies)
Government
reduces taxing
Government
increases
spending
Inflation
(contractionary
policies)
Government
increases
taxing
Government
decreases
spending
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Graphs of Effects
of PoliciesRecessionary
Gap
Inflationary
Gap
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SUPPLY-SIDE EFFECTS
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STAGFLATIONGraph
Occurs whenever
the aggregate
supply curve
shifts to the
left
Solutions
Supply-side
economics is an
attempt to cure
stagflation
Economists
recommend special
tax policies and less
government
regulations
Fiscal policy alone is
not enough to solve
this problem so the
FED implements
monetary policies as
well which is known
as policy mixing
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FORMULAS
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Calculating the Effects
Spending
Multiplier
A measure of the change
in aggregate
consumption which
occurs when one
person’s consumption
affects another’s and so
on
Tax Multiplier
A measure of the
change in aggregate
production caused by
changes in
government taxes
SM= 1/(MPS+MPI)
TM= -(MPC-MPI)/(MPS+MPI
)
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COMPLICATIONS
Reasons why policies can be
ineffective
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Crow
ding
Out
This occurs when the gov.
increases spending in a recession that causes them
to run a deficit The result of this is the gov. borrowing money from
banks and banks increasing interest rates
Ironically, increased interest rates, causes people to spend less so this cancels out the effect
of increased gov. spending
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Role of
ExpectationsTheory
Based on the
idea that
households and
businesses take
all available info
into account
when making
decisions
Implies that
fiscal policy will
be ineffective at
changing of
output
Example
The gov. uses
expansionary policy
People understand that
gov will deficit spend
Deficit spending=higher
prices in the future
Less people work and
less products are
produced now in
anticipation of higher
wages and prices
Unfortunately, this
cancels out the effect
of the implemented
policies
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Types of
Inflation
Demand-Pull
“too many dollars chasing
too few goods”
For example, an economy
reaches its maximum
production level and the
supply of goods and
services doesn’t meet the
demand of consumers.
The costs go up due to an
increase in demand and a
shortage in supply.
Cost-Push
Increases in production
costs that cause firms to
raise prices to avoid
losses
An example is when
workers demand an
increase in wages. When
this occurs, the
businesses need to raise
the prices of their goods
and services to diminish
any loss in profit.
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Phillip’s curve
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The Phillips Curve
The Phillips
tradeoff is the
inverse relationship
between
inflation and
unemployme
nt. The Phillips
Curve provides a
visual for this
concept
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The Phillips Curve
Short RunLong Run
In the short run, there is an
inverse relationship
between inflation rates and
unemployment rates
In the long run,
unemployment stays the
same and inflation is the
only factor that changes
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THE END