Fiscal Policy Government uses its powers of expenditure taxation and borrowing to alter the size of the circular flow of income in the economy to bring about greater consumer demand more employment inflationary restraint and other economic goals ID: 329480
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Slide1
Role of GovernmentSlide2
Fiscal Policy
Government uses its powers of expenditure, taxation, and borrowing to alter the size of the circular flow of income in the economy to bring about greater consumer demand, more employment, inflationary restraint and other economic goals.Slide3
Leakages and Injections
Circular flow of income
Sees the GDP as a total of all money payments in the economy
Leakages – any uses of income that cause money to be taken out of the income-expenditure stream of the economy (e.g. less money to be spent)
Taxes
Savings
ImportsSlide4
Leakages and Injections (cont’d)
Injection – any expenditure that causes money to be put into the income-expenditure stream (e.g. MORE money to be spent)
Government Spending
Investment Spending
ExportsSlide5
What does this mean?
The relationship between the leakages and the injections determine whether overall demand is growing or shrinking.
If sum OF LEAKAGES is greater than sum of INJECTIONS – demand will shrink.
Equilibrium – when they are equal amounts leakages and injectionsSlide6
Discretionary fiscal policy
Deliberate government action to stabilize the economy in the form of taxation or spending policies
Expansionary
fiscal policy
Government policies to increase aggregate demand through tax cuts, increased spending, or both.
Contractionary
fiscal policy
Govt policies to decrease aggregate demand through tax increases and/or decreased spendingSlide7
Tools of Fiscal Policy
Changes in spending
Increase general spending ( to stimulate economy)
Infrastructure programs
Changing in taxation
Change the amount of tax collected to stimulate economic activity, or restrain economic activity
Automatic stabilizers
Things that already exist and are built into the economy
EI/welfare – examples of automatic stabilizers Slide8
Government Budget Options
Deficit budget
Govt
spends more than it collects in tax revenue. It must borrow the money to cover the shortfall.
Surplus budget
When the government collects more tax revenue than it spends. There is money left over.
Balanced budget
When the government spends an amount equal to what it has collected in tax revenueSlide9
What role does government play?
During the Great Depression, Canada thought the market would just “correct itself”
After 3 years, it didn’t so they had to try something else
Government also didn’t have any responsibility to the people to help them (because there was no formal social welfare system)
Canada became a welfare state after the 1950s
The
govt
tries to help its citizens economicallySlide10
Role of Government
Very different opinions on role of government (Liberal/Left vs. Conservative/Right)
Complete “Matter of Opinion on p. 288-289 (#1)
Collect tax dollars from citizens/residents and spend money on various programs and services
Transfer payments from federal to provincial government
Most of the tax revenue is spent on 3 pillars:
Health
Social Services
EducationSlide11Slide12
Assignment
How
does the government use taxing and spending decisions (fiscal policy) to promote price stability, full employment, and economic growth
?
Predict the consequences of government debt on the individual and the economy.
How do you think the decision of government to spend more or less money on health and education would affect your standard of living and quality of life?
A matter of opinion – p. 288/289 #1