Fiscal Policy and inflation

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Fiscal Policy
The balance of government spending and
government revenue (taxes).
To control inflation, the Treasury may apply
contractionary fiscal policy.

By reducing Government spending and/or
increasing taxes, consumers, investors and
importers reduce; so Aggregate Demand shifts
left.
Contractionary Fiscal Policy
AD shifts left, so the price
level (inflation) falls from
P1.
At the same time,
GDP/Output falls from Y1
to Y2.
Positive; inflation is
controlled.
Negative; Unemployment
increases.
Facts and figures
Government Revenue;
http://www.treasury.govt.nz/economy/mei/ja
n14/04.htm
Tax revenue is the major source of money for
the government. Notice tax is increasing.
Facts and figures
Government spending.
Expenses are higher than revenue, but the
trend is a slight decrease in government
spending.
Major spending items are Social Security,
Health and Education.
Education decreased slightly, while Social
Security and Health have increased a small
amount.
Contractionary Fiscal Policy
As a result of increased taxation and
decreased spending, we should see inflation is
being kept low.
Inflation is at -0.2%


Pages 201 and 202.