Voiceover: I want to do a quick follow-up to the last video because I did not give a complete picture of all
of the fiscal policy tools that a government has at its disposal. What I focused on in the last video is a government that holds taxes constant, taxes constant, and increases spending. Spending goes up. The only way that a
government could do that is by taking on more debt, or I guess if there are some governments that are saving, saving less, but most of them, they're going to have
to take on more debt. So they're going to take on more debt. Just to think about it in terms of the, in terms of the GDP
expenditure components, we know that GDP, GDP is equal to consumption, which is mostly consumers, individuals, investment, which is mostly firms, and some consumer spending on new houses. Then you have government expenditure, and then you have net exports, which kind of completes the picture. But what we described in the last video is these two things are held constant. Taxes don't change. People, the government isn't
fueling its expenditures with more taxes, so this
part stays constant, but with the extra debt, the government spends
more, so this part goes up, everything else holds roughly constant, and so GDP would go up. The other tool that the government has, has at its disposal, is to hold spending constant, so spending is held constant, and lowering taxes, and lowering taxes, which would essentially put more money in the hands of consumers
of individuals, families, and firms. Once again, the only way they can do that, if you hold spending constant, and you're reducing your revenues, the only way they can
do that is once again, taking on more debt. This is a common theme here. They would have to take on more debt, assuming they don't have any savings to kind of eat up, to
finance this type of thing. Looking at this again, we have GDP is equal to
consumption plus investment plus government spending plus net exports, plus net exports, in this situation, government spending is held constant but because the consumers' and the firms' taxes have gone down, they have more to spend, and they will spend some component of it, and so these two pieces will go up, and GDP will go up. I just wanted to make
sure we added this picture right over here. Fiscal policy isn't just about increasing or decreasing government spending. It can also be about tax policy, increasing or decreasing taxes.