Fiscal PolicyTaxes and Spending

Agenda

• Whiteboards (10 minutes)

• Notes (20 minutes)

• Video (5-10 minutes)

What is fiscal policy?

Fiscal policy is an attempt to control the economy through the use of taxes and government spending.

Taxpayers Government

What are the two main types of fiscal policy?

A. Expansionary Fiscal Policy Increased government spending or a decrease in

taxes are the tools of an expansionary fiscal policy.• The purpose of this policy is to decrease

unemployment

B. Contractionary Fiscal Policy Decreased government spending or an increase in

taxes are the tools of a contractionary fiscal policy. The purpose of this policy is to decrease inflation.

Taxes

• Taxes are called revenue.

• The federal agency responsible for tax collection is the Internal Revenue Service (IRS).

Tax Policy

• Taxes affect how much money Americans have to spend which affects demand.

• Tax increases or tax cuts affect large numbers of Americans.

Tax Cuts—Expansionary Fiscal Policy

• Tax cuts allow the people or business whose taxes are cut to keep more of their income, or money.

• People will then either spend more money or businesses will invest more. This will stimulate the economy

People have more money to spend

(a greater ability to spend)

Demand increases and the economy

speeds-up

Government cuts taxes

Tax Increases—Contractionary Fiscal Policy

• Tax increases mean that people or businesses pay more of their income to the government

• Tax increases can reduce spending and affect demand

• Tax increases can affect how people choose to invest and affect capital investment in businesses.

People have less money

to spend(less abilityto spend)

Demand drops and the

economy slows down

Government raises taxes

Will this increase or decrease demand?Is it expansionary or contractionary?

1. The state government adds a sales tax on clothing over $50.

2. The federal government decides that it will not tax unemployment benefits any more.

3. The federal government reduces the tax on interest earned on bank accounts.

4. The state adds 25 cents to the existing tobacco tax.

Government Spending

• Expenditures are authorized by Congress and the President

• Most spending is categorized as mandatory (must be paid) or discretionary (government has a choice)

Mandatory Spending

• Entitlements – People who have paid in are entitled to receive a benefit – these are called transfer payments– Social Security– Medicare– Veterans benefits

• Interest on the debt

Discretionary Spending

• All of the other functions of the federal government

• This includes direct spending and grants (money) for states and Cities– Defense– Homeland Security– Transportation– Education– Agriculture

Spending Policy

• Government spending stimulates the economy by creating a demand for specific goods and services

Example: The Air Force buys planes from Boeing. Boeing hires workers to make the planes at good wages.

A few review questions

So, government might reduce taxes in order to:

• A. Slow down inflation

• B. Slow down interest rates

• C. Decrease spending on businesses

• D. Increase consumer spending and stimulate the economy

Another way the government might try to stimulate the economy

instead of reducing taxes:

• A. Increase spending

• B. Print more money

Cars Video

• Please answer the T/F questions after the video.

• https://www.youtube.com/watch?v=SYFYla1H7KE

T/F questions

• ____1. If an economy is improving or going faster each year, it is experiencing real economic growth.

• ____2. The 4 components of GDP are supply, demand, government spending and exports.

• ____3. The two tools of fiscal policy are tax cuts and interest rates.

• ____4. During a recession, the government will normally increase spending in order to stimulate

Exit Ticket

• Please complete the exit ticket at the bottom of your worksheet.

• You will turn this in to me at the end of the period.