Chapter 10 Fiscal Policy Define fiscal policy Identify

( ﺍﻟﺼﻮﺗﻲ ﺍﻟﺸﺮﺡ ﻋﺪﻡ ﻋﻦ )ﺑﻌﺘﺬﺭ Chapter 10 Fiscal Policy • Define fiscal policy. • Identify the tools of fiscal policy. • Explain the difference between expansionary fiscal policy and contractionary fiscal policy.

Definition of fiscal policy Fiscal policy is a demand-side policy that is used to control government spending, Taxation, Government transfer payment. It is implemented by the Ministry of finance. Tools of fiscal policy There are three tools of fiscal policy : - v Government spending. v Taxes. v Government transfer payment.

Types of fiscal Policy There are two types of fiscal policy: - 1 - Expansionary fiscal policy. Expansion fiscal policy is a policy that is designed to increase aggregate demand by increasing government spending on goods and services or by increasing personal consumption spending through decreasing personal income taxes (Direct taxes) There for , it used to close a recessionary gap Hence, during a recession, the government has three choice 1. Increase government spending. 2. Decrease taxes. 3. Increase government transfer payments.

2 - Contractionary Fiscal policy Contractionary fiscal policy is a Policy that is designed to decrease aggregate demand by decrease government spending on goods and services or by decreasing personal consumption spending through increasing personal income taxes or decrease government transfer payment, or decrease investment spending. There for it used to close an inflationary gap. Hence, during inflation, the government has three choise. 1. Decrease government spending. 2. Increase taxes. 3. Decrease government transfer payments.

Example Consider an economy described by the following equation. Cnsumption function C=10 -. 8 Y Taxes , T =100 Investment , I= 250 Government, G= 300 Potential real GDP Y*= 2700 1 - find the equilibrium real GDP. 2 -Determine whethere is an inflationary or recessionary gap. If so , then determine the amount of gap. 3 - how much government spending must change to close the gap?

4 - what is the required change in taxes to close the gap? ANSWER 1 - The Equilibrium GDP: Y= C+I+G Y= 10+. 8 Yd+250+300 Y=10+0. 8(y-t)+250+300 Y=10+0. 8(Y-100)+250+300 Y=10+. 8 y-80+550 Y-. 8 Y= 480. 2 Y=480 Y=2400 2 -Type and amount of the gap Gap= Y - Y* =2400 -2700= -300 The economy faces a recession gap equals 300 million L. E.