Transcript Chapter 15

Fiscal Policy
Section 1
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Fiscal Policy is the federal government’s use
of taxing and spending to keep the economy
stable
-Government spending has a large impact
on the economy
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Fiscal policy decisions, such as how much to
spend and how much to tax, are among the
most important decisions the federal
government makes.
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A federal budget states how much money the
government expects to get in that particular
year and how much money the government
can spend
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The federal governments prepares a new
budget each fiscal year (12 month period)
Federal agencies send
request for money to the
Office of Management
and Budget
Office of Management
work with President to
create a budget. President
then sends it to Congress
President signs
budget into law
President vetoes bill,
Congress must override
with 2/3 majority. If no
majority, there must be
compromise
Congress makes
changes to the
budget, sends it back
to the President
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Government spending can help increase or
decrease the output of the economy
Expansionary policies-increase output
Contractionary policies-decrease output
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If the federal government buys more goods
and services, it raises output and creates jobs
When the government cuts taxes, consumers
and businesses spend more/invest. This
increases demand and output
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If the federal government buys less goods
and services, it leads to slower GDP growth
When the government raises taxes,
consumers and businesses don’t spend as
much or save. This also slows GDP growth
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Difficulty changing spending levels
-Significant changes in government
spending must come from discretionary
spending
Predicting the future
-Economists often disagree as to what’s
best for the economy as well as predicting
its current state
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Delayed Results
-Change takes time
Political Pressures
-Voters can effect fiscal policy, such as
decisions involving tax cuts and/or hikes
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For fiscal policies to work, the judicial,
executive and legislative branch must all
work together
Need to look at state/regional economic
differences
Fiscal policy must coordinate with monetary
policies of the Federal Reserve
Section 2
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Classical economics is the idea that markets
regulate themselves (i.e. Adam Smith)
The Great Depression challenged the ideas of
classical economics
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Keynesian economics is the idea that the
economy is composed of 3 sectors:
individuals, businesses and government.
Government actions can make up for changes
in the other two
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Also argue that fiscal policy can fight
recessions and depressions
Government could increase spending during
a recession to make up for the decrease in
consumer spending
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The multiplier effect in fiscal policy means
that every dollar in fiscal policy creates a
greater than one dollar change in economic
activity
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Example: The government buys 10 billion
dollars worth of guns from Company A. Not
only did GDP increase because the
government spent 10 billion, but now
Company A has 10 billion dollars, some of
that money which they will spend.
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A stable economy is one where there are no
rapid changes in economic factors.
An automatic stabilizer is a government tax
or spending category that changes in
response to changes in GDP or income
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Supply Side Economics believe that taxes
have a negative influence on output
The Laffer curve show how both high and low
tax revenues can produce the same tax
revenues.
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The Great Depression-Increased government
spending
World War II- Increased government
spending
The 1960s- Proposed cuts to personal and
business income taxes. Increased spending
due to Vietnam War.
Supply side economics in the 1980s- Passed a
bill to reduce taxes by 25% over 3 years
Section 3
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A balanced budget is a budget in which
revenues are equal to spending
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A budget surplus
occurs when revenues
exceed spending
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A budget deficit occurs
when spending
exceeds revenues
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Creating money- The government can pay for
deficits by creating money, however, this can
lead to inflation
Borrowing money- The government can also
pay for deficits by borrowing money (ex.
Bonds)
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The national debt is the total amount of
money the federal government owes. This
money is owed to anyone who holds bonds.
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The deficit is the money the government
owes for one fiscal year. The national debt is
the total amount the government owes.
In dollar terms, the debt is extremely large
nearly
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When money is spent on bonds, that money
cannot be used for business investment. This
is called the crowding-out effect.
The larger the national debt, the more money
that is owed to bondholders and paying
interest on the debt. That’s money that
cannot be spend on other programs such as
education
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Keynesian economists argue that since
government spending and borrowing help
the economy, it outweighs the costs of
having high debt
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There have been attempts by Congress to
control deficits/budgets, but they have failed