Fiscal policy Daniel Begazo Lily Zhang Sabrina Tan.
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Transcript of Fiscal policy Daniel Begazo Lily Zhang Sabrina Tan.
![Page 1: Fiscal policy Daniel Begazo Lily Zhang Sabrina Tan.](https://reader035.fdocuments.us/reader035/viewer/2022062407/56649dff5503460f94ae7166/html5/thumbnails/1.jpg)
fiscal policy
Daniel Begazo Lily Zhang
Sabrina Tan
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What
is F
isca
l 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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Eco
nom
ic 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 w
e fi
x the
pro
ble
m?
Here
are
som
e so
lutio
ns!
Recession
(expansionary
policies)
Government
reduces
taxing
Government
increases
spending
Inflation
(contractionary
policies)
Government
increases
taxing
Government
decreases
spending
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Gra
phs o
f Eff
ects
of Po
licies
Recessionary
Gap
Inflationary
Gap
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SUPPLY-SIDE
EFFECTS
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STA
GFLA
TIO
NGraph
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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Calcu
latin
g th
e
Eff
ects
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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Cro
wdin
g O
ut
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
Exp
ecta
tions
Theory
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 o
f
Inflatio
n
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 P
hillip
s
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 P
hillip
s
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