• Unit 5: Fiscal Policy

    Governments use policies and tools to steer the macroeconomy toward three primary goals: full employment, price stability, and economic growth. In this unit, we study fiscal policy, which involves taxing and spending policies, including the fiscal legislation Congress enacts in the United States.

    Completing this unit should take you approximately 4 hours.

    • 5.1: Fiscal Policy

      Governments enact fiscal and economic policies using their spending and taxation powers to influence or help drive the economy. Politicians can use their powers to drive fiscal policy to promote strong and sustainable economic growth and reduce poverty.

    • 5.2: The Impact of Government Borrowing

      As our government continues to spend more, it needs to borrow more. This increased borrowing is what has led to tax rates continuously rising historically.

    • 5.3: Inflation and Unemployment

      In 1958, William Phillips (1914–1975), an New Zealand economist, discovered an inverse relationship between unemployment and inflation in the economic data he was studying. This relationship was later called the Phillips Curve. Prices rise when unemployment falls – more people have jobs and can afford to buy more. Prices fall when unemployment increases – fewer people have jobs and less money to spend. Hence the inverse relationship between these two variables. Naturally, higher levels of unemployment prompt businesses and customers to budget more – which is contractionary spending.

    • 5.4: The Keynesian Perspective

      John Maynard Keynes (1883–1946), an English economist, stated that three things affect consumption: disposable income, expected future income, and wealth or credit. The Keynesian perspective focuses on aggregate demand. Keynes argued that the amount of goods and services that sell (real GDP) depends on demand across the economy. If AD falls, we experience a recessionary gap; if it rises, we see an inflationary gap.

    • 5.5: The Neoclassical Perspective

      The Neoclassical view of macroeconomics is a revision of classical theories of the economy that predated the Great Depression during the 1930s. According to this perspective, the economy fluctuates around potential GDP and the natural unemployment rate in the long run. Neoclassical economics is a broad theory that focuses on supply and demand as the driving forces behind producing, pricing, and consuming goods and services. It emerged around 1900 to compete with the earlier theories of classical economics. This school of thought emphasizes the innate rationality of consumers, the importance of the profit motive for companies, the need for governments to advocate for market equilibrium, and the influence of utility on prices.

    • Unit 5 Assessment

      • Receive a grade