Transcript 5-1 Fiscal Policy

Fiscal Policy
Fiscal Policy
The use of
government
spending and
revenue collection
to influence the
economy.
It is a tool used to achieve economic growth,
full employment, and price stability.
Fiscal policy decisions are made each year
during the creation of the federal budget.
The federal budget is a written document that
shows the amount of money the government
expects to receive (revenues) and
spend (expenditures) in a year.
The federal government prepares a new
budget each fiscal year.
The fiscal year for the federal government
goes from October 1 - September 30
each year
4 Basic steps in Budgeting Process
Spending Proposals - federal agencies send
requests for money to the Office of
Management and Budget (OMB), a part of the
government’s Executive Branch.
In the Executive Branch - The OMB works
with the President to create a budget. The
budget is then sent to Congress for review.
4 Basic steps in Budgeting Process
In Congress - the budget is revised by budget
committees and sent back to the president for
approval.
The President - can:
1) sign the budget into law
2) veto the budget (Congress and the
President must then work out a compromise)
Fiscal Policy
Fiscal policy is
used by the
government to
control the output
of the economy.
This is done by manipulating government
spending (expenditures) and raising or
lowering taxes (revenues).
Expansionary Policies
The government uses
expansionary policies
to encourage
economic growth.
Expansionary policies are used to try to
prevent or to end a recession.
The government increases government spending to
help raise productivity and create jobs.
Government buys more goods and services.
Companies that sell goods to the government can
increase productivity and hire new workers.
Workers have more $$$ to spend in the economy.
This increases productivity in other areas.
Adds up to more output and more jobs in the
economy.
Expansionary Policies
By lowering taxes at the same time, the
government gives individuals even more
money to spend and businesses get to keep
more profits.
Assignment
• Create a graphic organizer which fully depicts the
three branch system of government and its impact
on fiscal policy.
• Students must include key terms and definitions(key
words).
• You can be creative with this assignment.
• This assignment is worth 50pts due at the end of the
period.
Contractionary Policies
The government uses
contractionary policies
to discourage
economic growth.
Contractionary policies are used to try slow
down the economy to prevent high inflation
that can occur when demand exceeds supply.
The government decreases government spending to
lower productivity.
Limiting spending by the federal government may
lead to slower GDP growth and decreased demand.
Decreased demand causes lower prices.
Companies cut production and possibly have
layoffs.
Less output in the economy.
Tools for fiscal policy
1. Multiplier Effect-expansionary
- Fiscal policy has a multiplier effect on the economy.
- Expansionary fiscal policy leads to an increase in real GDP
larger than the initial rise in aggregate spending caused by
the policy. The government spends an additional $4 Billion
through discretionary fiscal policy. The total effect on GDP
will be larger than $4 Billion.
- The multiplier effect refers to the additional shifts in
aggregate demand that result when expansionary fiscal
policy increases income and thereby increases consumer
spending.
- Conversely, contractionary fiscal policy leads to a fall in
real GDP larger than the initial reduction in aggregate
spending caused by the policy.
2. Automatic Stabilizers-contractionary
1. Exist and act on AD before a recession or inflationary
trend takes hold
2. Employment insurance and welfare: increased payments
during times of economic downturns
1. Help to maintain incomes during recessions
(maintain spending)
2. Either slows the leftward shift of AD or shifts curve
right
3. Progressive tax: as incomes rise, taxes rise
1. Slows down increases in consumption
2. Stops AD curve from shifting too quickly to the right
So what about Adam Smith and his
theory of the Invisible Hand?
The Great Depression showed
that classical economics was
not always practical.
A British economist,
John Maynard Keynes
proposed the idea that government could
and should prevent a depression or
recession through the use of taxation and
spending.
His theory is called Keynesian
Economics and it drove
American Economic Policy
from the 1930s - 1970s.
From the 70s to the present, different
Presidential Administrations have a
variety of economic policies in an
attempt create a balanced budget for the
national government.
The federal budget is
almost never balanced.
A budget deficit
occurs when
expenditures exceed
revenues.
The government borrows money by
issuing bonds.
The national debt is all
of the money the
government owes to
bondholders.
After a brief period of extra money in
the national budget in the 1990s,
recession, tax cuts, and war have caused
massive new deficits in the early 2000s.
WOW
The current national debt is