Fiscal Policy
Transcript: The two "tools" used in Fiscal Policy are taxing and spending, which are opposite exchanges of money. Discretionary Fiscal Policy involves purposefully altering taxation and spending programs in order to change aggregate demand and regulate the economy. Nondiscretionary Fiscal Policy are tools that work to stabilize the economy without any changes in taxation or spending levels. For example, spending programs such as unemployment and welfare benefits are stabilizers. The intended aim of Expansionary Fiscal Policy is to increase economic growth and have high employment. Discretionary and Nondiscretionary Fiscal Policy The unintended effect of Expansionary Fiscal Policy is too much economic growth suddenly, leading to inflation which causes the value of money to decrease. Fiscal Policy: It is the use of the Federal Government's power to tax and spend to regulate economic activity. Thania Stavropoulos Meagan Danielak 2nd Hour Cervi I. Expansionary Since this policy increases economic activity and lowers taxes, Households and Firms will have more money to spend and disposable income. Therefore, businesses will be able to produce more. Also, households will receive larger amounts in Social Security when the economy is growing, so they will be able to spend more, generating revenue for firms. FISCAL POLICY Contractionary Fiscal Policy is the opposite of Expansionary, and it is meant to slow down the economy by cutting government spending, raising taxes, or a combination of both. Expansionary Fiscal Policy increases the amount of economic activity and is accomplished by increasing government spending, lowering taxes, or by a combination of both. Contractionary Fiscal Policy affects the Households and Firms by slowing down the flow of money between the Product Market and the Resource Market. In this policy, the government intends for firms to slow production. Also, if inflation is successfully slowed down, then prices for households will go down. Fiscal Policy was first used to spur changes in our economy during the Great Depression in the 1930's. The idea came from John Keynes, a British economist, who believed that you could use expansionary or contractionary fiscal policy to alter the level of aggregate demand. The intended aim is to have stable prices by fixing the inflation (high prices). II. Contractionary Fiscal Policy is implemented by the legislative and executive branches in the United States government. For example, the President and Congress could decide to use their Fiscal powers to end inflation by increasing taxes or reducing government spending. What is it? Some unintended effects of Contractionary Fiscal Policy can be harmful to the economy. For instance, the economy can slow down too much, and that could lead to economic decline in the nation. It can also lead to a low point (contraction) in the business cycle, where unemployment rates will rise. h