Fiscal Policy Chapter 15
Dec 23, 2015
Fiscal Policy
Chapter 15
Setting Fiscal Policy: The Federal Budget
$7.7 Billion a day spent by government
Fiscal Policy is the use of government spending and revenue collection to influence the economy
Federal Budget Basics
Fiscal year is any 12 month period used for budgeting purposes.
October 1st thru September 30th
The Four Steps
Agencies write spending proposals The Executive Branch Creates a
Budget Congress Debates and
Compromises President approves
The Economic Cycles
Expansionary Policy Increased
government spending
Decreases taxes Or both
Contractionary Policy Decrease spending Increase taxes Or both
Limits of Fiscal Policy
Difficulty of changing spending levels
Predicting the future Delayed results Political pressures Coordinating fiscal policy
Fiscal Policy Options
Chapter 15 Section 2
Classical Economics
Adam Smith Self-interest, leads to regulation of
the market and equilibrium. Prices and supply and demand all
work together
Does not address a time frame!!!
Keynesian Economics
John Maynard Keynes (CANES)
The General Theory of Employment, Interest, and Money (1936) Wants to have
government intervene during economic downfalls
Keynesian Economics
Productive Capacity is the maximum output that an economy can sustain over a period of time without increasing inflation Must find a way to increase demand to
get out of the depression
Federal government must spend enough to increase demand, and once recovered back out.
Demand-Side Economics
Avoiding Recession
FDR uses expansionary fiscal policy through the New Deal This principle still divides the political
parties today. Republicans = tax cuts Democrats = expansive government
programs
Automatic Stabilizers
A tool of fiscal policy that increases or decreases automatically depending on changes in GDP or personal income
This has helped stabilize the overall economy by not allowing such large fluctuations in real GDP from year to year
Supply Side Economics
A school of thought based on the idea that the supply of goods drives the economy
The Laffer Curve
Shows the relationship between tax rate and total tax revenue
Taxes and Output
The heart of supply side argument is that a tax cut increases total employment
Thus even with lower taxes more people work and more tax revenue is brought in
Fiscal Policy in American History
WWII = Keynesian used and worked Post WWII = tax cuts during
recession of 1960s. Highest individual income tax was 90%
Fiscal Policy in American History
1980s Reagan cuts taxes and spending, moving to supply side economic ideas. Improves economy Leads to an ever increasing deficit
Fiscal Policy in American History
President Obama elected in 2008 and proposed to increase government spending to repair nation’s infrastructure
Budget Deficits and the National Debt
Chapter 15 Section 3
Balancing the Budget
Has not been balanced in decades, almost always a surplus or a deficit.
The total deficit for fiscal year 2009 was $1.42 trillion, previous record $413 Billion in 2004 This is partially political
How to fix a deficit
Create Money For small deficits
can be fixed by creating money (print of electric)
Can lead to inflation
Borrow Money Borrows money by
selling bonds
The National Debt
Deficit is amount of money borrowed for one fiscal year
Debt is the total money borrowed from before the fiscal year.
Measuring National Debt
$10.6 trillion in 2008 $12.9 trillion 2010 http://www.brillig.com/debt_clock/
Is the Debt a Problem?
Reduces investment funds Interest payments to bondholders Foreign ownership of national debt 25% of debt held by foreign
countries
Homework
#3-6 on pages 398, 407, and 414