Fiscal Policy

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Fiscal Policy

• Chapter 15

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Understanding Fiscal Policy

• Chapter 15, Section 1

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Fiscal Policy

• Fiscal policy is the use of government spending
  and revenue collection to influence the economy
• Federal Budgetplan for the reception and
  spending of government revenues
• Fiscal year12 month period that begins on any
  date

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Actions of Fiscal Policy

• Expansionary policy
• Fiscal policy that encourages economic growth
• Higher spending, tax cuts
• Contractionary Policy
• Fiscal policy that reduces economic growth
• Lower spending, higher taxes

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Limits of Fiscal Policy

• Hard for the government to change spending levels
• Hard to predict the future
• Sometimes, action is too late
• Delayed timechanges dont happen overnight

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Review

• 1. Fiscal policy is
• (a) the federal governments use of taxing and
  spending to keep the economy stable.
• (b) the federal governments use of taxing and
  spending to make the economy unstable.
• (c) a plan by the government to spend its
  revenues.
• (d) a check by Congress over the President.
• 2. Two types of expansionary policies are
• (a) raising taxes and increasing government
  spending.
• (b) raising taxes and decreasing government
  spending.
• (c) cutting taxes and decreasing government
  spending.
• (d) cutting taxes and increasing government
  spending.

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Fiscal Policy Options

• Chapter 15, Section 2

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Fiscal Policy Options

• Classical Economicsthe idea that the free market
  regulates itself
• Great Depression pointed out the weakness of this
  thought
• Keynesian Economics
• The idea that the government should increase
  spending to spark demand and help the economy
• Know as demand side economics

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Demand Side Economics

• Results in the multiplier effect
• Idea that 1 spending by the government results
  in many more in the private sector
• Automatic Stabilizers
• If set up properly, fiscal policy can
  automatically stabilize the economy
• Low incomelower taxes and more transfer payments
• High incomemore taxes and fewer transfer payments

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Supply Side Economics

• Belief that the economy should work to increase
  supply
• Too much government control will reduce
  productivity
• Taxes that are too high will discourage work
• Shown by the Laffer Curve
• Calls for less government spending and tax cuts

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Review

• 1. What are the two main economic problems that
  Keynesian economics seeks to address?
• (a) business and personal taxes
• (b) military and other defense spending
• (c) periods of recession or depression and
  inflation
• (d) foreign aid and domestic spending
• 2. Government taxes or spending categories that
  change in response to changes in GDP or income
  are called
• (a) fiscal policy.
• (b) automatic stabilizers.
• (c) income equalizers.
• (d) expansionary aids.

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Budget Deficits and the National Debt

• Chapter 15, Section 3

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Deficits and National Debts

• The federal budget is rarely balanced
• Either running a surplus or a deficit
• Two ways to combat the deficit
• Create money
• May lead to hyperinflation
• Borrow money
• Sell bonds
• Borrowing increases the debt

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Problems with the National Debt

• Borrowing money creates a national debt
• Debt is not the same as the deficit
• Problems arise with the national debt
• Creates investment competition for private
  business
• This is known as the crowding out effect
• Servicing the debt
• Paying off interest on the debt is an opportunity
  cost

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Review

• 1. A balanced budget is
• (a) a budget in which expenditures equal
  revenues.
• (b) a budget in which expenditures do not equal
  revenues.
• (c) a budget in which the government spends
  money.
• (d) a budget in which revenues equal taxes.
• 2. Which of the following are problems
  associated with a national debt?
• (a) increased spending on defense and education
• (b) the crowding-out effect and interest payments
  on the debt
• (c) interest payments on the debt and too much
  individual investment
• (d) increased individual investment and decreased
  government spending