Income Distribution

Refers to how a nations total

GDP is distributed amongst its
population.
Distributed unequally to
different families in the country;
rich, middle income and poor
families.

Lorenz Curve:
A curve showing the proportion of
national income earned by a given
percentage of the population.
e.g what proportion of national
income is earned by the top 10% of
the population?

Lorenz Curve
% of National Income

This line represents

the
situation
if
income
was
distributed
equally.
The
poorest
10%
would earn 10% of
national income, the
poorest 30% would
earn 30% of national
income.

30%
10%

10%

30%

Percentage of Population

Lorenz Curve
% of National Income

In
this
second
example, the Lorenz
curve
lies
further
below
the
line
of
equality.
Now,
the
poorest 30% only earn
7% of the national
income.

20%
7%
30%

Percentage of Population

Fiscal Policy and the Economy

The total level of government spending can be

changed to help increase or decrease the output
of the economy
Expansionary Policies: Policies that try to
increase the output of the economy.
Contractionary Policies: Policies that try to
decrease the output of the economy.

Discretionary Fiscal Policy

The deliberate manipulation of taxes
and spending by government for the
purpose of altering real GDP and
employment, controlling inflation and
stimulating economic growth

Expansionary Policies
During a contraction or recession, the government
can do two things:
1.
2.

Decrease taxes
Increase spending

Decrease taxes
Gives people more money
to spend
Increase demand
Increase production
increase jobs
increase jobs = more
demand etc. etc.

Increase spending
Increases demand
for goods
Increase
production
increase jobs
increase jobs =
more demand etc.
et

Who favors the policy?

Decreasing Taxes

Increase Spending

Favored by Republicans

Favored by Democrats

Let people decide what to

spend their money on and let
those who earned the money
benefit from it.

Government should spend to

redistribute wealth to the
poor, rather than give the
rich a tax cut

Contractionary Policies
During a period of excessive inflation (during a period of
expansion), the government can do two things:
1.
2.

Increase taxes
Decrease spending

Increase Taxes

People have less

money to spend

Less money = less

demand

Less demand = lower

inflation

Decrease Spending

Less money in
economy

Less money = less

demand

Less demand = lower

inflation

Who favors which policy?

Trick Question! Neither party favors

Contractionary Fiscal Policies!!!
This is one of the problems with Fiscal
Policy