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fiscal policy

fiscal policy. Daniel Begazo Lily Zhang Sabrina Tan. Fiscal policy refers to the government’s response to inflation and/or recession in an economy They accomplish this through implementing contractionary or expansionary policies The tools they use are spending and taxing.

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fiscal policy

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  1. fiscal policy Daniel Begazo Lily Zhang Sabrina Tan

  2. Fiscal policy refers to the government’s response to inflation and/or recession in an economy • They accomplish this through implementing contractionary or expansionary policies • The tools they use are spending and taxing What is Fiscal Policy?

  3. Inflation A period of inflation is characterized by a general increase in prices and a fall in the purchasing power of money Recession • A recession is a period of temporary economic decline characterized by a drop in GDP and employment Economic Issues

  4. DEMAND-SIDE EFFECTS

  5. Inflation (contractionary policies) Government increases taxing Government decreases spending Recession (expansionary policies) • Government reduces taxing • Government increases spending How do we fix the problem?Here are some solutions!

  6. Inflationary Gap Recessionary Gap Graphs of Effects of Policies

  7. SUPPLY-SIDE EFFECTS

  8. Solutions Supply-side economics is an attempt to cure stagflation Economists recommend special tax policies and less government regulations Fiscal policy alone is not enough to solve this problem so the FED implements monetary policies as well which is known as policy mixing Graph • Occurs whenever the aggregate supply curve shifts to the left STAGFLATION

  9. FORMULAS

  10. Tax Multiplier A measure of the change in aggregate production caused by changes in government taxes Spending Multiplier • A measure of the change in aggregate consumption which occurs when one person’s consumption affects another’s and so on Calculating the Effects TM= -(MPC-MPI)/(MPS+MPI) SM= 1/(MPS+MPI)

  11. COMPLICATIONS Reasons why policies can be ineffective

  12. This occurs when the gov. increases spending in a recession that causes them to run a deficit • The result of this is the gov. borrowing money from banks and banks increasing interest rates • Ironically, increased interest rates, causes people to spend less so this cancels out the effect of increased gov. spending Crowding Out

  13. Example The gov. uses expansionary policy People understand that gov will deficit spend Deficit spending=higher prices in the future Less people work and less products are produced now in anticipation of higher wages and prices Unfortunately, this cancels out the effect of the implemented policies Theory • Based on the idea that households and businesses take all available info into account when making decisions • Implies that fiscal policy will be ineffective at changing of output Role of Expectations

  14. Cost-Push Increases in production costs that cause firms to raise prices to avoid losses An example is when workers demand an increase in wages. When this occurs, the businesses need to raise the prices of their goods and services to diminish any loss in profit. Demand-Pull • “too many dollars chasing too few goods” • For example, an economy reaches its maximum production level and the supply of goods and services doesn’t meet the demand of consumers. The costs go up due to an increase in demand and a shortage in supply. Types of Inflation

  15. Phillip’s curve

  16. The Phillips tradeoff is the inverse relationship between inflation and unemployment. • The Phillips Curve provides a visual for this concept The Phillips Curve

  17. Long Run Short Run The Phillips Curve In the long run, unemployment stays the same and inflation is the only factor that changes In the short run, there is an inverse relationship between inflation rates and unemployment rates

  18. THE END

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