fiscal policy
TRANSCRIPT
What would you do with an unexpected $1,000 tax return?
Most people would spend at least part of it
What would you do if you owed an extra $1,000 in taxes?
People would reduce their consumption spending & save money to pay it
Fiscal Policy
the deliberate use of taxes and spending to influence the economy (speed it up or slow it down)
“Stimulus” money
For many years, people believed in classical economics
• laissez-faire = let things be
• supply and demand takes care of everything (remember the “invisible hand” theory proposed by Adam Smith)
• recessions and depressions would work themselves out
When did this change?
1930’s Great Depression changed everything
Unemployment was 25% in 1933 and never dropped below 14% the rest of the decade. . .the economy was not taking care of itself!
Recall: What is the unemployment % today?
John Maynard Keynes
British scholar who theorized that:• government should get involved• gov’t can control taxing and spending• the extremes of the business cycle could be
eliminated
His ideas are called Keynesian economics
Fiscal policy during recession
• Either increase gov’t spending or cut taxes– spending more on gov’t projects means more
jobs– cutting taxes for individuals means more
money for people to spend; cutting taxes for businesses means more capital investments or hiring more people
Fiscal policy during recession (cont.)
• With tax cuts & stimulus spending, recovery will occur
• This is called “Stepping on the gas”
Fiscal policy to prevent inflation
• Gov’t should decrease gov’t spending or raise taxes– (Opposite effects from the last slide of notes)
• This will slow economy down, and slow inflation
• This is called “Stepping on the brakes”
Online open note quiz