How Government Uses Fiscal Policy to Influence the Economy | Episode 23

well in this brief video we're going to talk about how the government influences the economy there are two different tools that the government has at its disposal to influence the the economy itself and those are both fiscal policy as well as monetary policy for this brief video we're going to focus on fiscal policy and explaining what that is and really how that works how does it actually affect the economy as a whole but fiscal policy is the government's use of taxation as well as spending in an attempt to influence the economy okay monetary policy are attempts by the government to influence the economy by controlling the money supply or the amount of money in circulation the primary the primary body or government entity that is in charge of monetary policy is the Federal Reserve Bank as I said before we're not gonna get into too much on monetary policy this video is going to focus on fiscal policy and ultimately what the effect is but back to fiscal policy we talked about those two different avenues that the government has to essentially affect the economy or influence the economy the first of which is taxation of course being the amount of money that you and I of course pay in taxes every year and also spending the government is obviously a big spender and has a lot of assets at its disposal and it can in turn use those particular assets to spend towards different projects with an attempt to influence the economy so you might ask really well how does that work why does what the government does with regards to taxation and what it spends why does it matter and if you look at this brief diagram I have here the government spending the government is a very very large entity obviously it controls a lot of money and so one example I'm going to provide is the economic stimulus Act of 2008 remember that this was signed by President George Bush at the time and at this point in time we were kind of potentially getting into the economic recession that we all as of now obviously did take place and so in an attempt to maybe lessen the harmful effects of the recession or ideally eliminate the effects entirely they sign and approve the economic stimulus Act of 2008 and if you remember that particular Act made it so that there was an additional payment issued to u.s. citizens in certain dollar amounts I believe the amount was $600 per individual and a potentially up to $1,200 per couple now that that might be a little different but that's roughly with the dollar amounts and what they are and that was a payment that was made directly to consumers directly to people like you and I okay because the idea behind it was that if we in turn had an increase surplus of money access to funds that we didn't normally have that we would probably spend that right if you look at savings rates in the US we are historically very very poor savers we spend a lot of money we don't necessarily shelve any of it for for future use at least as a whole okay I know individually some people are really good but as a whole the United States it we like to spend money that's what we do and so the government says you know what what if we were to give people money that they didn't normally have anywhere from 600 to 1200 dollars roughly they would in turn probably spend that and so if we gave people access to money they would in turn spend that money and not would do is that would inject that back into the economy right because you're paying for goods and services okay which would in turn mean that businesses now have more demand okay and then of course what happens when businesses have increased demand you know they may not have the human resources or the labor necessary to accommodate or fulfill that demand and what that causes businesses to do is businesses to hire right and so we can hopefully effect the unemployment rate and then once people have jobs they in turn have access to money and disposable incomes that they can in turn react in to the economy because the logic being is someone who's unemployed probably is not going to have a great deal of disposable income they're probably not going to be spending a great deal of money on different goods and services which is going to affect our GDP or gross domestic product which is essentially the income of a country it's the total value of goods and services that a particular country produces within a given year now one important factor to consider is that two thirds of GDP is dependent upon consumer spending is dependent upon people like you and I going out there and purchasing various goods and services okay it's a very very big component and so you can see if consumers like you and I aren't spending money if we are holding back what we have because we're uncertain about what's gonna go on in the future in terms of the economy then that's going to be bad for gross domestic product that's gonna be bad for growth bad for production bad for business bad for jobs okay and so you can see how this whole cycle kind of works interdependently right people need access to money to in turn buy goods and services right businesses need people to buy goods and services so they can be profitable and in turn hire people and then we of course want relatively low unemployment rates because we want people to have access to funds and we want them to have the ability to reinvest those funds back into the economy so it works in a very cyclical type basis and it's extremely important that we do have people who have access to funds people that have jobs and those different types of things so this is one resource that the federal government has is this fiscal policy piece you've seen probably in years past where they've adjusted tax rates right lowering tax rates is another example of fiscal policy because you're trying to keep as much money as possible into the hands of consumers in the hopes that they will eventually spend them now there obviously is some argument as to whether or not consumers actually will spend that money and there's some argument as to whether or not the economic stimulus act of oh eight actually was successful but as a whole most of the research supports that it did provide somewhat of an increase as somewhat of a benefit although some people argue if it was really that significant considering how expensive it was to implement

Maurice Vega

10 Responses

  1. We want to use this video for an ECON course at Santa Rosa Junior College. Would you please grant us permission to caption the video so it has punctuation and clear sentences? If you turn on Community Contributions in YouTube, we could add the better captions to these videos. Alternatively, we can send you a corrected caption file that you can upload in YouTube. One more option is to use a site such as that will embed the video and give us an interface to overlay the video with the better caption file.

    All of these options leave the control in your hands. If you take down the video, it will no longer appear in the course, we will just be embedding from YouTube, not downloading the video.

  2. I still don't understand. What are some examples? I have to do a project in economy about a current event relating to Fiscal policy. I don't understand that though.

  3. No being a creeper but I love you. Lol so much of this was flying over my head in class, now it makes so much more sense!!! 😀

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