Transcript Fiscal Policy - Cobb Learning

Fiscal Policy
How much money does the Federal
Government spend . . .
. . . Every Year?
$2.3 Trillion Dollars
That’s $2,300,000,000,000
. . . Every Day?
$6 Billion or
. . . Every Hour?
$250 Million or
$6,000,000,000
$250,000,000
That’s about $4.2 Million every minute and $70,000 every second
Fiscal vs Monetary
Fiscal Policy is the way the government collects
and spends revenue to influence the economy.
– Changes in federal government spending or taxes
designed to promote full employment, price stability
and reasonable rates of economic growth.
Monetary Policy is the actions the Federal
Reserve takes to influence inflation and the
GDP.
– Decisions that lead to changes in the supply of
money and the availability of credit.
Federal Budget
The Office of Management and Budget (OMB)
spends the year collecting data from all parts of
the Federal Government on how much money
they need next year.
Then they advise the President on what
everyone reported
The President proposes a budget
Congress then looks at and changes it and
eventually proposes a modified version
Congress then adds appropriation bills that add
new spending to the budget for specific projects
The President then signs it into law or vetoes it.
Expansionary Policies
Fiscal policies that encourage economic
growth
– Government spending more
– Tax Cuts
– Designed to increase
aggregate demand
– Intent to increase GDP
and reduce unemployment
Contractionary Policies
Fiscal policies that reduce economic
growth
– Government spending less
– Tax increases
– Designed to decrease
aggregated demand
– Intent to control
inflation
Limits of Fiscal Policy
Can only change Discretionary Spending
(about 38% of budget)
Hard to predict the future
Results not immediate
Political Pressure
Coordinating with States
Fiscal Policy Options
1. Classical Economics – Free markets
regulate themselves
-
If we leave the economy alone, it will
eventually work itself out.
This is how we did it, UNTIL the Great
Depression
Fiscal Policy Options
2. Keynesian Economics
(a.k.a. : Demand-Side Economics or
Traditional Economics)
- Government action should be used to
increase or decrease demand
- For example, if there is a depression,
only the government has money. So the
government should use that money to
increase demand
Fiscal Policy Options
2. Keynesian Economics (continued)
- Increasing taxes and reducing spending
lowers consumer demand
- Decreasing taxes and increasing
spending increases consumer demand
Multiplier Effect – If the government
spends $1 it has more than a $1 effect on
the economy
Fiscal Policy Options
3. Supply-side Economics
- Government Action should be used to
increase or decrease supply
- Increasing taxes lowers companies
supply
- Decreasing taxes increases companies
supply
U.S. Fiscal Policy History
A. World War II – Increased spending by
Government on war goods, increased
demand.
- Result: Great Depression ends, economy
booms
U.S. Fiscal Policy History
B. Kennedy Administration
– Economy going well.
Chief Financial Policy
Advisor: Walter Heller
convinces Kennedy to
cut taxes to decrease
unemployment rate.
- Result: Economy grows
rapidly
U.S. Fiscal Policy History
A. Supply Side Policies of the 1980’s
- Ronald Reagan enacts Supply-side
policies to end high inflation of the 1970’s
- Does NOT want to spend (and increase
demand) to fix economy
- Used Federal Reserve
to tighten money supply
- Result: Economy Recovers
- However: During Reagan
years government spending
rises every year.