Chapter 15 Fiscal Policy - PowerPoint Presentation

1. Chapter 15Fiscal Policy

2. Chapter 15Section 1

3. What is Fiscal Policy?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

4. What is Fiscal Policy? Fiscal policy decisions, such as how much to spend and how much to tax, are among the most important decisions the federal government makes.

5. Fiscal Policy and the Federal BudgetA federal budget states how much money the government expects to get in that particular year and how much money the government can spend

6. Fiscal Policy and the Federal BudgetThe federal governments prepares a new budget each fiscal year (12 month period)

7. The Budget ProcessFederal agencies send request for money to the Office of Management and BudgetOffice of Management work with President to create a budget. President then sends it to CongressCongress makes changes to the budget, sends it back to the PresidentPresident vetoes bill, Congress must override with 2/3 majority. If no majority, there must be compromise President signs budget into law

8. Fiscal Policy and the EconomyGovernment spending can help increase or decrease the output of the economyExpansionary policies-increase outputContractionary policies-decrease output

9. Expansionary Fiscal PolicyIf the federal government buys more goods and services, it raises output and creates jobsWhen the government cuts taxes, consumers and businesses spend more/invest. This increases demand and output

10. Contractionary Fiscal PoliciesIf the federal government buys less goods and services, it leads to slower GDP growthWhen the government raises taxes, consumers and businesses don’t spend as much or save. This also slows GDP growth

11. Limits of Fiscal PolicyDifficulty changing spending levels -Significant changes in government spending must come from discretionary spendingPredicting the future -Economists often disagree as to what’s best for the economy as well as predicting its current state

12. Limits of Fiscal PolicyDelayed Results -Change takes timePolitical Pressures -Voters can effect fiscal policy, such as decisions involving tax cuts and/or hikes

13. Coordinating Fiscal PolicyFor fiscal policies to work, the judicial, executive and legislative branch must all work together Need to look at state/regional economic differencesFiscal policy must coordinate with monetary policies of the Federal Reserve

14. Chapter 15Section 2

15. Classical EconomicsClassical economics is the idea that markets regulate themselves (i.e. Adam Smith)The Great Depression challenged the ideas of classical economics

16. Keynesian EconomicsKeynesian 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

17. Keynesian EconomicsAlso argue that fiscal policy can fight recessions and depressionsGovernment could increase spending during a recession to make up for the decrease in consumer spending

18. The Multiplier EffectThe multiplier effect in fiscal policy means that every dollar in fiscal policy creates a greater than one dollar change in economic activity

19. The Multiplier EffectExample: 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.

20. Automatic StabalizersA 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

21. Supply Side EconomicsSupply Side Economics believe that taxes have a negative influence on outputThe Laffer curve show how both high and low tax revenues can produce the same tax revenues.

22. Fiscal Policy in American HistoryThe Great Depression-Increased government spendingWorld War II- Increased government spendingThe 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

23. Chapter 15Section 3

24. Balancing the BudgetA balanced budget is a budget in which revenues are equal to spending

25. Balancing the BudgetA budget surplus occurs when revenues exceed spendingA budget deficit occurs when spending exceeds revenues

26. Resp0nding to Budget DeficitsCreating money- The government can pay for deficits by creating money, however, this can lead to inflationBorrowing money- The government can also pay for deficits by borrowing money (ex. Bonds)

27. The National DebtThe national debt is the total amount of money the federal government owes. This money is owed to anyone who holds bonds.

28. The National DebtThe 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

29. Is the Debt a Problem?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

30. Is the Debt a Problem?Keynesian economists argue that since government spending and borrowing help the economy, it outweighs the costs of having high debt

31. Deficit and Debt ReductionThere have been attempts by Congress to control deficits/budgets, but they have failed