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3.2: Analyze fiscal policy and its effects on inflation, unemployment, and economic growth.
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US Government Goals
FISCAL POLICY
US Economic Goals
US Governement Goals
1) GDP Growth Rate of 2-3%
2) Unemployment Rate between 4-6%
3) Stable Inflation between 1-2%
Grow the Economy
If the US Congress wishes to intervene into the economy in an effort to meet the three economic goals, it has two options!
1) Increase Government Spending
2) Cut Taxes
Increase Government Spending
Increase Government Spending
GDP=C+I+G+Nx, If Consumer Spending drops the government can offset this lack of spending by boosting Government Spending.
Income/Corporate Tax Cuts
Income/Corporate Tax Cuts
- Cutting Income Taxes on higher-income tax brackets allow these individuals to invest their earnings in Capital Goods thus driving down SRAS to a new LRAS to the right of the original equilibrium.
- Cutting corporate tax rates causes SRAS to shift to the right. Higher GDP, more employment.
Slowdown the Economy
If the US Congress wishes to intervene into the economy in an effort to meet the three economic goals, it has two options!
1) Decrease Government Spending
2) Increase Income/Corporate Tax Rates
Decrease Government Spending
Decrease Government Spending
GDP=C+I+G+Nx, If Consumer Spending increases the government can offset this increase in Consumer Spending by decreasing Government Spending.
Why do you think this rarely happens?
Increase Income/Corporate Tax Rates
Increase Income/Corporate Tax Rates
- Increasing taxes on individuals lowers aggregrate demand/GDP.
- Increasing taxes on corporations lowers aggregrate supply.