Introduction To Fiscal Policy

Boundless Lecture Slides
Available on the Boundless Teaching Platform
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless Teaching
Platform
Boundless empowers educators to engage their students
with affordable, customizable textbooks and intuitive
teaching tools. The free Boundless Teaching Platform
gives educators the ability to customize textbooks in
more than 20 subjects that align to hundreds of popular
titles. Get started by using high quality Boundless books,
or make switching to our platform easier by building from
Boundless content pre-organized to match the assigned
textbook. This platform gives educators the tools they
need to assign readings and assessments, monitor
student activity, and lead their classes with pre-made
teaching resources.
Using Boundless Presentations

The Appendix
The appendix is for you to use to add depth and
breadth to your lectures. You can simply drag and
drop slides from the appendix into the main
presentation to make for a richer lecture
experience.
Get started now at:

http://boundless.com/teaching-platform
Free to edit, share, and copy

Feel free to edit, share, and make as many copies
of the Boundless presentations as you like. We
encourage you to take these presentations and
make them your own.
If you have any questions or problems please email:

educators@boundless.com
About Boundless
Boundless is an innovative technology company making education more affordable and
accessible for students everywhere. The company creates the worlds best open educational
content in 20+ subjects that align to more than 1,000 popular college textbooks. Boundless
integrates learning technology into all its premium books to help students study more efficiently
at a fraction of the cost of traditional textbooks. The company also empowers educators to
engage their students more effectively through customizable books and intuitive teaching tools
as part of the Boundless Teaching Platform. More than 2 million learners access Boundless free
and premium content each month across the companys wide distribution platforms, including its
website, iOS apps, Kindle books, and iBooks. To get started learning or teaching with Boundless,
visit boundless.com.
Fiscal Policy > Introduction to Fiscal Policy
Introduction to Fiscal Policy
Defining Fiscal Policy

How Fiscal Policy Relates to the AD-AS Model
Expansionary Versus Contractionary Fiscal Policy
Fiscal Levers: Spending and Taxation
How Fiscal Policy Can Impact GDP
Fiscal Policy and the Multiplier
www.boundless.com/economics?campaign_content=book_1515_section_112&campaign_term=Economics&utm_campaign=powerpoint&utm_medi
um=direct&utm_source=boundless
Defining Fiscal Policy

The government has two levers when setting fiscal policy: it can change the
levels of taxation and/or it can change its level of spending.
There are three types of fiscal policy: neutral policy, expansionary policy,and
contractionary policy.
In expansionary fiscal policy, the government spends more money than it collects
through taxes. This type of policy is used during recessions to build a foundation
for strong economic growth and nudge the economy toward full employment.
In contractionary fiscal policy, the government collects more money through taxes
than it spends. This policy works best in times of economic booms. It slows the
pace of strong economic growth and puts a check on inflation.
Times of Recession
View on Boundless.com
www.boundless.com/economics/textbooks/boundless-economics-textbook/fiscal-policy-26/introduction-to-fiscal-policy-112/defining-fiscal
-policy-428-12525?campaign_content=book_1515_section_112&campaign_term=Economics&utm_campaign=powerpoint&utm_medium=direct&utm_source
How Fiscal Policy Relates to the AD-AS Model

Aggregate demand is made up of consumption, investment, government
spending, and net exports. The aggregate demand curve will shift as a result of
changes in any of these components.
Expansionary policy involves an increase in government spending, a reduction in
taxes, or a combination of the two. It leads to a right-ward shift in the aggregate
demand curve.
Contractionary policy involves a decrease in government spending, an increase
in taxes, or a combination of the two. It leads to a left-ward shift in the aggregate
demand curve.
Expansionary and Contractionary Fiscal Policy

www.boundless.com/economics/textbooks/boundless-economics-textbook/fiscal-policy-26/introduction-to-fiscal-policy-112/how-fiscal-polic
y-relates-to-the-ad-as-model-429-12526?campaign_content=book_1515_section_112&campaign_term=Economics&utm_campaign=powerpoint&utm_medi
Expansionary Versus Contractionary Fiscal Policy

Keynes advocated counter-cyclical fiscal policies--implementing an expansionary
fiscal policy during a recession and a contractionary policy during times of rapid
economic expansion.
In pursuing either expansionary or contractionary fiscal policy, the government
has two levers - government spending and taxation levels.
The effects of fiscal policy can be limited by crowding out.
Counter-cyclical Fiscal Policies

www.boundless.com/economics/textbooks/boundless-economics-textbook/fiscal-policy-26/introduction-to-fiscal-policy-112/expansionary-ver
sus-contractionary-fiscal-policy-430-12527?campaign_content=book_1515_section_112&campaign_term=Economics&utm_campaign=powerpoint&utm_
Fiscal Levers: Spending and Taxation

In expansionary policy, the extent to which government spending and tax cuts
increase aggregate demand depends on spending and tax multipliers.
The tax multiplier is smaller than the spending multiplier. This is because the
entire government spending increase goes towards increasing aggregate
demand, but only a portion of the increased disposable income (resulting for
lower taxes) is consumed.
The multiplier effect of a tax cut can be affected by the size of the tax cut, the
marginal propensity to consume, as well as the crowding out effect.
Spending and Saving

www.boundless.com/economics/textbooks/boundless-economics-textbook/fiscal-policy-26/introduction-to-fiscal-policy-112/fiscal-levers-s
pending-and-taxation-431-12528?campaign_content=book_1515_section_112&campaign_term=Economics&utm_campaign=powerpoint&utm_medium=dire
How Fiscal Policy Can Impact GDP

The fiscal multiplier is the ratio of change in national income to the change in
governments spending that causes it.
The multiplier effect occurs when an initial incremental amount of spending leads
to an increase in income and consumption, which further increases income,
which further increases consumption, and so on in a virtuous circle, resulting in
an overall increase in the GDP.
The multiplier effect is evident when the multiplier is greater or less than one.
In certain cases, multiplier values of less than one have been empirically
measured, suggesting that government spending can crowd out private
investment or consumer spending.
Fiscal Multiplier Example
www.boundless.com/economics/textbooks/boundless-economics-textbook/fiscal-policy-26/introduction-to-fiscal-policy-112/how-fiscal-poli
cy-can-impact-gdp-432-12529?campaign_content=book_1515_section_112&campaign_term=Economics&utm_campaign=powerpoint&utm_medium=direct&
Fiscal Policy and the Multiplier

The size of the increase in GDP depends on the type of fiscal policy.
The multiplier on changes in government spending is larger than the multiplier on
changes in taxation levels.
The taxation multiplier is smaller than the spending multiplier because part of any
change in taxes is absorbed by savings.
Multiplier Effect
www.boundless.com/economics/textbooks/boundless-economics-textbook/fiscal-policy-26/introduction-to-fiscal-policy-112/fiscal-policy-an
d-the-multiplier-433-12530?campaign_content=book_1515_section_112&campaign_term=Economics&utm_campaign=powerpoint&utm_medium=direct&ut
Appendix
Fiscal Policy
Key terms
fiscal multiplier The ratio of a change in national income to the change in government spending that causes it.
fiscal multiplier The ratio of a change in national income to the change in government spending that causes it.
fiscal policy Government policy that attempts to influence the direction of the economy through changes in government
spending or taxes.
fiscal policy Government policy that attempts to influence the direction of the economy through changes in government
spending or taxes.
multiplier A ratio used to estimate total economic effect for a variety of economic activities.
Tax multiplier The change in aggregate demand caused by a change in taxation levels.
Fiscal Policy
Multiplier Effect
The multiplier effect determines the extent to which fiscal policy shifts the aggregate demand curve and impacts output.
Wikimedia. "Contractionary and expansionary fiscal policy." CC BY-SA https://commons.wikimedia.org/wiki/File:Contractionary_and_expansionary_fiscal_policy.jpg
Fiscal Policy
Times of Recession
In times of recession, the government uses expansionary fiscal policy to increase the level of economic activity and increase employment.
Wikimedia. "Bowery men waiting for bread in bread line, New York City, Bain Collection." Public domain
https://commons.wikimedia.org/wiki/File:Bowery_men_waiting_for_bread_in_bread_line,_New_York_City,_Bain_Collection.jpg View on Boundless.com
Fiscal Policy
Highway Construction
The government can implement expansionary fiscal policy through increased spending, such as paying for the construction of new highways.
Flickr. "All sizes | East Fork Bitterroot Road Recovery Act Project | Flickr - Photo Sharing!." CC BY
http://www.flickr.com/photos/fsnorthernregion/5187895366/sizes/o/in/photostream/ View on Boundless.com
Fiscal Policy
Expansionary and Contractionary Fiscal Policy

Expansionary policy shifts the AD curve to the right, while contractionary policy shifts it to the left.
Fiscal Policy
Counter-cyclical Fiscal Policies

Keynesian economists advocate counter-cyclical fiscal policies. This means increased spending and lower taxes during recessions and lower spending
and higher taxes during economic boom times.
Fiscal Policy
Fiscal Multiplier Example

The money spent on construction of a plant becomes wages to builders. The builders will have more disposable income, increasing their consumption
and the aggregate demand.
Wikimedia. "Construction Workers." CC BY http://commons.wikimedia.org/wiki/File:Construction_Workers.jpg View on Boundless.com
Fiscal Policy
Spending and Saving

The tax multiplier is smaller than the government expenditure multiplier because some of the increase in disposable income that results from lower taxes
is not just consumed, but saved.
Wikimedia. "1970sgrocerystore." CC BY http://commons.wikimedia.org/wiki/File:1970sgrocerystore.jpg View on Boundless.com
Fiscal Policy
When does the government use expansionary fiscal policy?
A) In times of weak or negative economic growth.
B) In times of strong economic growth.
C) In times of high price inflation.
D) In times of full employment.
Fiscal Policy
When does the government use expansionary fiscal policy?
A) In times of weak or negative economic growth.
B) In times of strong economic growth.
C) In times of high price inflation.
D) In times of full employment.
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Fiscal Policy
Why do governments often engage in expansionary fiscal policy

during a recession?
A) To increase consumer confidence, which in turn leads to stable
expectations
B) To increase the size of the deficit, which produces higher interest rates
C) To increase aggregate demand, which in turn boosts output and
employment
D) All of these answers
Fiscal Policy
Why do governments often engage in expansionary fiscal policy

during a recession?
A) To increase consumer confidence, which in turn leads to stable
expectations
B) To increase the size of the deficit, which produces higher interest rates
C) To increase aggregate demand, which in turn boosts output and
employment
D) All of these answers
Fiscal Policy
Contractionary fiscal policy will cause a(n) __________ in

government spending and shift the aggregate demand curve to
the _________.
A) increase; left
B) decrease; left
C) decrease; right
D) increase; right
Fiscal Policy
Contractionary fiscal policy will cause a(n) __________ in

government spending and shift the aggregate demand curve to
the _________.
A) increase; left
B) decrease; left
C) decrease; right
D) increase; right
Fiscal Policy
According to Keynes, how does increased government spending

affect an economy during a recession?
A) Lowers interest rates, decreases savings, and increases investment
B) Lowers interest rates, increases savings, and decreases investment

C) Lowers aggregate demand and decreases consumption and
production
D) Raises aggregate demand and increases consumption and production
Fiscal Policy
According to Keynes, how does increased government spending

affect an economy during a recession?
A) Lowers interest rates, decreases savings, and increases investment
B) Lowers interest rates, increases savings, and decreases investment

C) Lowers aggregate demand and decreases consumption and
production
D) Raises aggregate demand and increases consumption and production
Fiscal Policy
Expansionary fiscal policy can be achieved through

____________.
A) lower government spending and/or tax cuts
B) higher government spending and/or tax cuts
C) higher government spending and/or tax increases
D) lower government spending and/or tax increases
Fiscal Policy
Expansionary fiscal policy can be achieved through

____________.
A) lower government spending and/or tax cuts
B) higher government spending and/or tax cuts
C) higher government spending and/or tax increases
D) lower government spending and/or tax increases
Fiscal Policy
How does the effect of a change in taxes compared to the effect

of an equal sized change in government expenditures?
A) It has the same effect as an equal sized change in government
expenditures.
B) It is smaller, because government expenditures do not affect
consumption.
C) It is larger, because the government controls it.
D) It is smaller, because taxes initially change consumption by MPC times
the tax change.
Fiscal Policy
How does the effect of a change in taxes compared to the effect

of an equal sized change in government expenditures?
A) It has the same effect as an equal sized change in government
expenditures.
B) It is smaller, because government expenditures do not affect
consumption.
C) It is larger, because the government controls it.
D) It is smaller, because taxes initially change consumption by MPC times
the tax change.
Saylor OER. "Economics Saylor.org Free Online Courses Built by Professors." CC BY 3.0 http://www.saylor.org/majors/Economics/
Fiscal Policy
Which of the following variables will affect the magnitude of the

multiplier effect for a tax cut?
A) The crowding out effect
B) All of these answers
C) The marginal propensity to consume
D) The size of the tax cut
Fiscal Policy
Which of the following variables will affect the magnitude of the

multiplier effect for a tax cut?
A) The crowding out effect
B) All of these answers
C) The marginal propensity to consume
D) The size of the tax cut
Fiscal Policy
Why is the effect of a government expenditure multiplier

transmitted throughout the economy?
A) Government spending influences the exchange rate
B) Government spending changes the interest rate
C) There is no change in taxes

D) Government spending causes a change in consumption spending
which affects the equilibrium income
Fiscal Policy
Why is the effect of a government expenditure multiplier

transmitted throughout the economy?
A) Government spending influences the exchange rate
B) Government spending changes the interest rate
C) There is no change in taxes

D) Government spending causes a change in consumption spending
which affects the equilibrium income
Fiscal Policy
Why does the multiplier effect exist?

A) Because a change in autonomous expenditure induces households to
save
B) Because a change in autonomous expenditure induces the country to
export
C) Because a change in autonomous expenditure is part of the
government's stabilization policy
D) Because a change in expenditure leads to changes in income,
generating further spending
Fiscal Policy
Why does the multiplier effect exist?

A) Because a change in autonomous expenditure induces households to
save
B) Because a change in autonomous expenditure induces the country to
export
C) Because a change in autonomous expenditure is part of the
government's stabilization policy
D) Because a change in expenditure leads to changes in income,
generating further spending
Fiscal Policy
Which of the following shows the flow of changes through which

an increase in government spending leads to a larger increase in
GDP?
A) G increases -> C Increases -> I increases -> Y increases -> Cycle
continues
B) G increases -> Y Increases -> C increases -> Y increases -> Cycle
continues
C) G increases -> I Increases -> Y increases -> C increases -> Cycle
continues
D) G increases -> Y Increases -> NX increases -> C increases -> Cycle
continues
Fiscal Policy
Which of the following shows the flow of changes through which

an increase in government spending leads to a larger increase in
GDP?
A) G increases -> C Increases -> I increases -> Y increases -> Cycle
continues
B) G increases -> Y Increases -> C increases -> Y increases -> Cycle
continues
C) G increases -> I Increases -> Y increases -> C increases -> Cycle
continues
D) G increases -> Y Increases -> NX increases -> C increases -> Cycle
continues
Fiscal Policy
The fiscal multiplier can be used to predict ________.

A) How much interest rates will rise as a result of changes in the inflation
rate
B) How much a change in investment will affect the interest rate
C) All of these answers
D) How much output will fall or rise as a result of a change in incomes
Fiscal Policy
The fiscal multiplier can be used to predict ________.

A) How much interest rates will rise as a result of changes in the inflation
rate
B) How much a change in investment will affect the interest rate
C) All of these answers
D) How much output will fall or rise as a result of a change in incomes
Fiscal Policy
Attribution
Wikipedia. "Fiscal policy." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Fiscal_policy
Wiktionary. "fiscal policy." CC BY-SA 3.0 http://en.wiktionary.org/wiki/fiscal+policy
Wikispaces. "mreape - UNIT 3 National Income and Price Determination." CC BY-SA
http://mreape.wikispaces.com/UNIT+3+National+Income+and+Price+Determination
Wikispaces. "mreape - UNIT 3 National Income and Price Determination." CC BY-SA
http://mreape.wikispaces.com/UNIT+3+National+Income+and+Price+Determination
Wikispaces. "McHenry's AP Wiki - Fiscal Policy." CC BY-SA http://mchenry.wikispaces.com/Fiscal+Policy
Wiktionary. "fiscal policy." CC BY-SA 3.0 http://en.wiktionary.org/wiki/fiscal+policy
Wikipedia. "Keynesian economics." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Keynesian_economics#Active_fiscal_policy
Wikipedia. "Keynesian economics." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Keynesian_economics#Active_fiscal_policy
Wikipedia. "Macroeconomics." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Macroeconomics
Wikispaces. "econ101-powers - Discretionary and Automatic Fiscal Policy." CC BY-SA
http://econ101-powers.wikispaces.com/Discretionary+and+Automatic+Fiscal+Policy
Wikispaces. "econ101-powers-sectionc - Fiscal Policy, Deficit, and Surplus." CC BY-SA
http://econ101-powers-sectionc.wikispaces.com/Fiscal+Policy,+Deficit,+and+Surplus
Wikispaces. "econ101-powers - Discretionary and Automatic Fiscal Policy." CC BY-SA
http://econ101-powers.wikispaces.com/Discretionary+and+Automatic+Fiscal+Policy
Wiktionary. "multiplier." CC BY-SA 3.0 http://en.wiktionary.org/wiki/multiplier
Wikispaces. "Moeller - Unit Three." CC BY-SA http://moeller.wikispaces.com/Unit+Three
Wikispaces. "HFEcon - Spending and Tax Multiplier Practice--Answer
Key.docx
- copies
Detail."
CC BY-SA
Free to share,
print, make
and changes.
Get yours at www.boundless.com
Fiscal Policy
Wikispaces. "HFEcon - Spending and Tax Multiplier Practice--Answer Key.docx - Detail." CC BY-SA
http://hfecon.wikispaces.com/file/detail/Spending+and+Tax+Multiplier+Practice--Answer+Key.docx
Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//economics/definition/tax-multiplier
Wikispaces. "jiryih - CFA Session 6." CC BY-SA http://jiryih.wikispaces.com/CFA+Session+6
Wikipedia. "Fiscal multiplier." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Fiscal_multiplier
Wikipedia. "fiscal multiplier." CC BY-SA 3.0 http://en.wikipedia.org/wiki/fiscal%20multiplier
Wikipedia. "Multiplier (economics)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Multiplier_(economics)
Wikispaces. "nrapmacro - Module21.ppt - Detail." CC BY-SA http://nrapmacro.wikispaces.com/file/detail/Module21.ppt
Wikispaces. "nrapmacro - Module21.ppt - Detail." CC BY-SA http://nrapmacro.wikispaces.com/file/detail/Module21.ppt
Wikipedia. "fiscal multiplier." CC BY-SA 3.0 http://en.wikipedia.org/wiki/fiscal%20multiplier

Introduction To Fiscal Policy

Uploaded by

Copyright:

Available Formats

You might also like

Introduction To Fiscal Policy

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Introduction To Fiscal Policy

Uploaded by

Copyright:

Available Formats

Boundless Lecture Slides

Available on the Boundless Teaching Platform

Using Boundless Presentations

Get started now at:

Free to edit, share, and copy

If you have any questions or problems please email:

Fiscal Policy > Introduction to Fiscal Policy