Fiscal policy involves changes to government spending and taxes to influence economic activity. Expansionary fiscal policy includes increasing spending or decreasing taxes, while contractionary policy means decreasing spending or increasing taxes. The purpose is to achieve long-run growth, full employment, and stable prices. While tax increases may raise revenues up to a point, the Laffer Curve shows revenues decline beyond a certain tax rate as incentives to work and invest diminish.

1. Fiscal Policy
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2. What is fiscal policy?
changes in government
spending or taxes to alter
the economy
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3. What are examples of
expansionary fiscal policy?
• Increase government
spending
• Decrease taxes
• increase government
spending and taxes equally
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4. What are examples of
contractionary fiscal policy?
• Decrease government
spending
• Increase taxes
• Decrease government
spending and taxes equally
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5. budget surplus
government revenues
exceed government
expenditures in a
given time period
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6. budget deficit
government expenditures
exceed government
revenues in a given time
period
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7. What is the purpose
of fiscal policies?
To achieve long-run
growth in output, full
employment, and a
lower price level
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8. demand-side fiscal policy
A fiscal policy that
emphasizes government
policies that increase
demand
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9. supply-side fiscal policy
A fiscal policy that
emphasizes government
policies that increase
supply
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10. Will an increase in taxes
lead to higher
government revenues?
?????
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11. Laffer Curve
the idea that increasing
taxes from zero will
increase tax revenues up to
a certain point
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12. What happens beyond
a certain point?
Tax revenues begin to
decline
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13. Why does the shrink
happen?
Workers have less
incentive to work and
investors have less of an
incentive to invest
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14. The Laffer Curve
B
Federal Tax Revenue
Rmax
C
R
D
Federal Tax Rate
A
0 Tmax T 100% 14
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