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2. • One major function of the government is to
stabilize the economy (prevent unemployment
or inflation)
• Stabilization can be achieved in part by
manipulating the public budget-government
spending and tax collections-to increase
output and employment or to reduce
inflation.

3. • Congress reviews budget, enacts
several.
• The President vetoes measures.

4. 1. Balanced Budget
2. Surplus Budget
3. Deficit Budget

5. •What tools does the government have
to regulate the economy?
•Who implements fiscal policy?

6. • TAXES
–Tax rates
• Income, corporate, excise, FICA
–Tax incentives
• GOV’T SPENDING
–Public goods, defense, social programs

7. 1. Expansionary fiscal policy: used to combat a
recession.
2. Contractionary fiscal policy: used to combat
demand-pull inflation, due to excess
spending.
“What can government do?”

8. Expansionary Fiscal Policy
To Reduce Unemployment…
a. Decrease taxes
b. Increase government spending
c. Combo of the two

9. Contractionary Fiscal Policy
To Reduce Inflation…
a. Increase Taxes
b. Decrease Government Spending
c. Combo of the two

10. • Economist with a
very different view
from Adam Smith.
• Keynes said that the
government SHOULD
get involved in the
economy
(to a limited extent.)

11. TAX INCENTIVES (CREDITS)
Given to businesses and individuals to get
them to do something the government
wants them to do. (buy fuel-efficient cars, hire people
coming off of welfare.)
–During a slowdown of the economy
• INCREASE tax incentives
–During an inflationary period
• DECREASE tax incentives.

12. GOVERNMENT SPENDING
Buying all the things that government
provides, from highways, to military, to
education.
– During a slowdown of the economy
• INCREASE spending.
– During an inflationary period
• DECREASE spending.

13. • Shocks Originating from Abroad
• Net Export Effect