Fiscal PolicyFiscal Policy

Chapter 15Chapter 15

Understanding Fiscal Understanding Fiscal PolicyPolicy

Chapter 15, Section 1Chapter 15, Section 1

Fiscal PolicyFiscal Policy

Fiscal policy is the use of Fiscal policy is the use of government spending and revenue government spending and revenue collection to influence the economycollection to influence the economy Federal Budget…plan for the reception Federal Budget…plan for the reception

and spending of government revenuesand spending of government revenues Fiscal year…12 month period that Fiscal year…12 month period that

begins on any datebegins on any date

Actions of Fiscal PolicyActions of Fiscal Policy

Expansionary policyExpansionary policy Fiscal policy that encourages economic Fiscal policy that encourages economic

growthgrowth Higher spending, tax cutsHigher spending, tax cuts

Contractionary PolicyContractionary Policy Fiscal policy that reduces economic Fiscal policy that reduces economic

growthgrowth Lower spending, higher taxesLower spending, higher taxes

Limits of Fiscal PolicyLimits of Fiscal Policy

Hard for the government to change Hard for the government to change spending levelsspending levels

Hard to predict the futureHard to predict the future Sometimes, action is too lateSometimes, action is too late

Delayed time…changes don’t happen Delayed time…changes don’t happen overnightovernight

ReviewReview

1. Fiscal policy is1. Fiscal policy is(a) (a) the federal government’s use of taxing and spending the federal government’s use of taxing and spending

to keep the economy stable.to keep the economy stable.(b) (b) the federal government’s use of taxing and spending the federal government’s use of taxing and spending

to make the economy unstable.to make the economy unstable.(c) (c) a plan by the government to spend its revenues.a plan by the government to spend its revenues.(d) (d) a check by Congress over the President.a check by Congress over the President.

2. Two types of expansionary policies are 2. Two types of expansionary policies are (a) (a) raising taxes and increasing government spending.raising taxes and increasing government spending.(b) (b) raising taxes and decreasing government spending.raising taxes and decreasing government spending.(c) (c) cutting taxes and decreasing government spending.cutting taxes and decreasing government spending.(d) (d) cutting taxes and increasing government spending.cutting taxes and increasing government spending.

Fiscal Policy OptionsFiscal Policy Options

Chapter 15, Section 2Chapter 15, Section 2

Fiscal Policy OptionsFiscal Policy Options

Classical Economics…the idea that Classical Economics…the idea that the free market regulates itselfthe free market regulates itself Great Depression pointed out the Great Depression pointed out the

weakness of this thoughtweakness of this thought Keynesian EconomicsKeynesian Economics

The idea that the government should The idea that the government should increase spending to spark demand and increase spending to spark demand and help the economyhelp the economy

Know as demand side economicsKnow as demand side economics

Demand Side EconomicsDemand Side Economics

Results in the multiplier effectResults in the multiplier effect Idea that $1 spending by the Idea that $1 spending by the

government results in many more in the government results in many more in the private sectorprivate sector

Automatic StabilizersAutomatic Stabilizers If set up properly, fiscal policy can If set up properly, fiscal policy can

automatically stabilize the economyautomatically stabilize the economy Low income…lower taxes and more transfer Low income…lower taxes and more transfer

paymentspayments High income…more taxes and fewer transfer High income…more taxes and fewer transfer

paymentspayments

Supply Side EconomicsSupply Side Economics

Belief that the economy should work Belief that the economy should work to increase supplyto increase supply Too much government control will Too much government control will

reduce productivityreduce productivity Taxes that are too high will discourage Taxes that are too high will discourage

workwork Shown by the Laffer CurveShown by the Laffer Curve

Calls for less government spending and Calls for less government spending and tax cutstax cuts

ReviewReview

1. What are the two main economic problems that 1. What are the two main economic problems that Keynesian economics seeks to address?Keynesian economics seeks to address?(a) (a) business and personal taxesbusiness and personal taxes(b) (b) military and other defense spendingmilitary and other defense spending(c) (c) periods of recession or depression and inflationperiods of recession or depression and inflation(d) (d) foreign aid and domestic spendingforeign aid and domestic spending

2. Government taxes or spending categories that 2. Government taxes or spending categories that change in response to changes in GDP or income change in response to changes in GDP or income are calledare called(a) (a) fiscal policy.fiscal policy.(b) (b) automatic stabilizers.automatic stabilizers.(c) (c) income equalizers.income equalizers.(d) (d) expansionary aids.expansionary aids.

Budget Deficits and the Budget Deficits and the National DebtNational Debt

Chapter 15, Section 3Chapter 15, Section 3

Deficits and National DebtsDeficits and National Debts

The federal budget is rarely balancedThe federal budget is rarely balanced Either running a surplus or a deficitEither running a surplus or a deficit

Two ways to combat the deficitTwo ways to combat the deficit Create moneyCreate money

May lead to hyperinflationMay lead to hyperinflation Borrow moneyBorrow money

Sell bondsSell bonds Borrowing increases the debtBorrowing increases the debt

Problems with the National DebtProblems with the National Debt

Borrowing money creates a national Borrowing money creates a national debtdebt Debt is not the same as the deficitDebt is not the same as the deficit

Problems arise with the national debtProblems arise with the national debt Creates investment competition for Creates investment competition for

private businessprivate business This is known as the crowding out effectThis is known as the crowding out effect

Servicing the debtServicing the debt Paying off interest on the debt is an Paying off interest on the debt is an

opportunity cost opportunity cost

ReviewReview

1. A balanced budget is 1. A balanced budget is (a) (a) a budget in which expenditures equal revenues.a budget in which expenditures equal revenues.(b) (b) a budget in which expenditures do not equal revenues.a budget in which expenditures do not equal revenues.(c) (c) a budget in which the government spends money.a budget in which the government spends money.(d) (d) a budget in which revenues equal taxes.a budget in which revenues equal taxes.

2. Which of the following are problems associated 2. Which of the following are problems associated with a national debt?with a national debt?(a) (a) increased spending on defense and education increased spending on defense and education (b) (b) the crowding-out effect and interest payments on the the crowding-out effect and interest payments on the

debtdebt(c) (c) interest payments on the debt and too much individual interest payments on the debt and too much individual

investmentinvestment(d) (d) increased individual investment and decreased increased individual investment and decreased

government spendinggovernment spending