Remember Aggregate Demand Aggregate Supply This formula also

Remember Aggregate Demand Aggregate Supply? This formula also works for AD

Remember the graph? https: //www. youtube. com/watch? v=a 2 az. B 2 eag 5 I&list=PLBC 35 DEA 1 D 1 A 98034&index=6

I. Tools of fiscal policy A. Taxes B. Government Spending

II. Expansionary Fiscal Policy A. Put in place to fix recessionary gap B. Goals 1. combat recession 2. stimulate the economy 3. increase AD 4. Shift AD curve to the right – close recessionary gap

II. Expansionary Fiscal Policy C. Tools 1. Increase government spending a. spending increase shifts AD to the right 2. Reduce taxes a. Tax cut puts money in the hands of consumers b. Consumers spend additional money to shift AD curve to the right. D. May cause budget deficit

Expansionary Policy on the graph • During a recession, short run equilibrium is below full employment level of output. • AD is too low • Government can increase AD by: • Spending more (in the formula G ) • Cutting taxes (which means you will spend more and in the formula C )

III. Contractionary Fiscal Policy A. Put in place to fix inflationary gap B. Goals 1. combat demand pull inflation 2. slow economics growth 3. decrease AD 4. Shift AD curve to the left– close inflationary gap

III. Contractionary Fiscal Policy C. Tools 1. cut government spending a. spending cut shifts AD to the left 2. increase taxes a. Tax increase takes money away from consumers b. Consumers spend less money shifting AD left D. May cause budget surplus

Contractionary Policy on the graph • When there is inflation, short run equilibrium is above full employment level of output. • AD is too high • Government can decrease AD by: • Spending less (in the formula G ) • Raising taxes (which means you will spend less and in the formula C ) https: //ww w. youtube. com/watch ? v=9 Bg. Ifhnyeo

What kind of fiscal policy should be pursued in order to “fix” the economy? Should we expand or contract?

The economy is experiencing a recession Expand

The economy is experiencing inflation Contract

The latest economic statistics show an unemployment rate of 12% Expand

Inflation is at 27% Contract

Contract

Expand

Are the following fiscal policies expansionary or contractionary?

The Government cuts business taxes Expansionary –- The business tax cut increases investment spending

The Government increases spending Expansionary –- Increase in government spending increases aggregate demand

The Government increases the personal income tax. Contractionary – personal disposable income decreases because of the tax increases thus reducing consumption and investment spending.

IV. Discretionary and Automatic Stabilizers A. Discretionary 1. a specific action that has to be taken by government 2. passing a law to change taxes or spending B. Automatic stabilizers 1. policies or laws already in place 2. unemployment insurance – payments keep AD from falling as much as they would otherwise https: //www. youtube. com/watch? v=TY 3 Jox cy. PAM

Do the following scenarios represent • automatic or • discretionary stabilizers AND Is it an example of • Expansionary or • contractionary policy

The Government cuts personal income tax rates. • Discretionary • Expansionary

Incomes rise; as a result, people pay a larger fraction of their income in taxes. • Automatic • Contractionary

As a result of a recession, more families qualify for food stamps and welfare benefits. • Automatic • Expansionary

The government raises corporate income tax rates. • Discretionary • Contractionary

The government launches a major new space program to explore Mars. • Discretionary • Expansionary

Corporate profits increase; as a result, government collects more corporate income taxes. • Automatic • Contractionary

Let’s do this practice!