Post on 01-Jan-2016
Fiscal PolicyFiscal Policy
Two types of fiscal policyTwo types of fiscal policy
Expansionary – increased spending Expansionary – increased spending or decreased taxesor decreased taxes
Contractionary – decreased spending Contractionary – decreased spending or increased taxesor increased taxes
Type of fiscal Type of fiscal policypolicy
Changes in Changes in government government spendingspending
Changes in Changes in taxestaxes
ExpansionaryExpansionary IncreaseIncrease DecreaseDecrease
ContractionarContractionaryy
DecreaseDecrease IncreaseIncrease
Crowding outCrowding out
Increased government spending Increased government spending doesn’t necessarily lead to increased doesn’t necessarily lead to increased total spendingtotal spending
Private spending may decreasePrivate spending may decrease
Complete crowding out means no Complete crowding out means no gain in total spendinggain in total spending
Crowding out could be incompleteCrowding out could be incomplete
John Maynard KeynesJohn Maynard Keynes
Too little spending = high Too little spending = high unemploymentunemployment
Previously economists thought Previously economists thought decreased spending = lower pricesdecreased spending = lower prices
Keynes said this wouldn’t happen Keynes said this wouldn’t happen because workers wouldn’t accept because workers wouldn’t accept lower wageslower wages
Therefore we needed expansionary Therefore we needed expansionary policiespolicies
Criticisms of KeynesCriticisms of Keynes
Doesn’t consider crowding outDoesn’t consider crowding out
Opened the door to government Opened the door to government intervention into the economyintervention into the economy
Crowding inCrowding in
Decreased government spending Decreased government spending doesn’t = decreased total spendingdoesn’t = decreased total spending
Crowding in can be complete or Crowding in can be complete or incompleteincomplete
Tax policiesTax policies
After-tax or disposable income = After-tax or disposable income = income left after taxes are paidincome left after taxes are paid
Lowering taxes = increased after-tax Lowering taxes = increased after-tax spendingspending
Raising taxes = decreased after-tax Raising taxes = decreased after-tax spendingspending
Supply sideSupply side
The lower the tax rate, the more The lower the tax rate, the more people are willing to workpeople are willing to work
This increases supplyThis increases supply
This helps the economyThis helps the economy
Tax cuts and tax revenuesTax cuts and tax revenues
Will cutting taxes decrease tax Will cutting taxes decrease tax revenues??revenues??
Lower taxes might lead to increased Lower taxes might lead to increased income since people are willing to income since people are willing to work morework more
This will actually increase tax revenueThis will actually increase tax revenue
PolicyPolicy Condition Condition existingexisting
Total Total spending spending affected?affected?
Policy Policy meet meet objective objective ??
Reduce Reduce unemploymeunemploymentnt
ExpansionarExpansionary policyy policy
No No CrowdingCrowding
outoutYesYes YesYes
Reduce Reduce unemploymeunemploymentnt
ExpansionarExpansionary policyy policy
CompleteComplete
CrowdingCrowding
OutOutNoNo NoNo
Reduce Reduce unemploymeunemploymentnt
ExpansionarExpansionary policyy policy
Incomplete Incomplete crowding crowding outout
YesYes YesYes
Reduce Reduce inflationinflation
ContractionaContractionary policyry policy
No No crowdingcrowding
ininYesYes YesYes
Reduce Reduce inflationinflation
ContractionaContractionary policyry policy
CompleteComplete
CrowdingCrowding
ininNoNo NoNo
Reduce Reduce inflationinflation
ContractionaContractionary policyry policy Incomplete Incomplete
crowding incrowding in YesYes YesYes