Government Policies DemandSide Policies Discretionary Policy Fiscal Policy

Business Cycle and Fiscal Policy The goal of fiscal policy is to minimize output

Business Cycle and Fiscal Policy Contractionary Expansionary The goal of fiscal policy is to

Expansionary Fiscal Policy A government can try to eliminate a recessionary gap by: •

Contractionary Fiscal Policy A government can try to eliminate an inflationary gap by: •

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Government Policies Demand-Side Policies Discretionary Policy Fiscal Policy Supply-Side Policies Automatic Stabilizers Monetary Policy Interventionist Market-Based

Government Policies Demand-Side Policies Discretionary Policy Fiscal Policy Supply-Side Policies Automatic Stabilizers Monetary Policy Interventionist Market-Based Fiscal Policy: Manipulations by a government of its own expenditures and taxes to influence the level of aggregate demand

Business Cycle and Fiscal Policy The goal of fiscal policy is to minimize output gaps, thus reducing fluctuations in the business cycle.

Business Cycle and Fiscal Policy Contractionary Expansionary The goal of fiscal policy is to minimize output gaps, thus reducing fluctuations in the business cycle. • Expansionary fiscal policy increases aggregate demand • Contractionary fiscal policy decreases aggregate demand

Expansionary Fiscal Policy A government can try to eliminate a recessionary gap by: • Increasing government spending • Decreasing personal income taxes • Decreasing corporate income taxes What components of GDP would these tactics affect? How?

Expansionary Fiscal Policy A government can try to eliminate a recessionary gap by: • Increasing government spending (+G) • Decreasing personal income taxes (+discretionary income => +C) • Decreasing corporate income taxes (+after-tax profit => +I) Draw a diagram showing how expansionary fiscal policy could help close a recessionary gap.

Contractionary Fiscal Policy A government can try to eliminate an inflationary gap by: • Decreasing government spending (-G) • Increasing personal income taxes (-discretionary income => -C) • Increasing corporate income taxes (- after-tax profit => -I) Draw a diagram showing how contractionary fiscal policy could help close an inflationary gap.