Chapter 11 - Fiscal Policy

1. FISCAL
POLICY
Governments use spending
and taxing powers to
promote stable and
sustainable growth.
CHAPTER 11

2. FISCAL POLICY
• the means by which a government
adjusts its spending levels and tax
rates to monitor and influence a
nation's economy
• the sister strategy to monetary policy

8. • based on the
theories of British
economist John
Maynard Keynes
• also known
as Keynesian
economics

9. This theory basically states that
governments can influence
macroeconomic productivity levels by
increasing or decreasing tax levels and
public spending.
This influence, in turn, curbs inflation,
increases employment and maintains a
healthy value of money.

10. Public
spending
Changing
tax rates

11. The purpose of Fiscal Policy
• Stimulate economic growth in a
period of a recession.
• Keep inflation low
• Basically, fiscal policy aims to
stabilise economic growth, avoiding a
boom and bust economic cycle.

12. BOOM
BUST

13. Deflation or Recession

14. Deflation or Recession
• Economic policy dictates deficit
budget
• This means that the government
can or should spend more than
what it collects through its taxes.

15. SPENDI
NG
MORE

17. MORE
MONE
Y

18. MORE
SALES

19. MORE
EMPLOY
MENT

20. MORE
INCOME
S

21. LEVELSof
PRODUCTIO
N

23. • Tax cuts mean that the taxes
imposed on persons and on
businesses are cut.
• If this happens, persons would
have greater disposable
incomes and corporations
would retain higher incomes.

24. • Higher income would be
translated into more inflows into
the circular flow, thus,
activating the economy
through higher consumer and
business spending.

25. Inflationary Periods

26. Inflationary Periods
• Economic policy dictates a surplus
or balanced budget
• This means that the government
should spend less than its budget.

27. SPENDI
NG
LESS

29. AGGREGATE
DEMAND

30. DEMANDfor
GOODS and
SERVICES

31. • Less demand for goods and
services would eventually arrest
price increases until they are
lowered to reasonable levels.
• During this period, tax increases
can also be resorted to.

33. • Reasonable tax increases
would mean less incomes in
the hands of consumers and
business firms.
• Less consumer and business
demands would mean lower
aggregate demand.

34. DEMANDfor
GOODS and
SERVICES

35. ECONOMIC
activity

36. MACROECONOMIC
EFFECTS
GOVERNMENT EXPENDITURE AND TAX
POLICY

37. expenditure impact
financial impact
supply impact

38. THE BOTTOM
LINE

39. • One of the biggest obstacles
facing policymakers is deciding
how much involvement the
government should have in the
economy.
• Indeed, there have been various
degrees of interference by the
government over the years.

40. But for the most part, it is accepted
that a degree of government
involvement is necessary to
sustain a vibrant economy, on
which the economic well-being of
the population depends.