Fiscal Policy

Fiscal Policy The use of government spending and revenue collection to influence the economy. It is a tool used to achieve economic growth, full employment, and price stability.

Fiscal policy decisions are made each year during the creation of the federal budget. The federal budget is a written document that shows the amount of money the government expects to receive (revenues) and spend (expenditures) in a year.

The federal government prepares a new budget each fiscal year. The fiscal year for the federal government goes from October 1 - September 30 each year

4 Basic steps in Budgeting Process Spending Proposals - federal agencies send requests for money to the Office of Management and Budget (OMB), a part of the government’s Executive Branch. In the Executive Branch - The OMB works with the President to create a budget. The budget is then sent to Congress for review.

4 Basic steps in Budgeting Process In Congress - the budget is revised by budget committees and sent back to the president for approval. The President - can: 1) sign the budget into law 2) veto the budget (Congress and the President must then work out a compromise)

Fiscal Policy Fiscal policy is used by the government to control the output of the economy. This is done by manipulating government spending (expenditures) and raising or lowering taxes (revenues).

Expansionary Policies The government uses expansionary policies to encourage economic growth. Expansionary policies are used to try to prevent or to end a recession.

Government buys more goods and services. The government increases government spending to help raise productivity and create jobs. Government buys more goods and services. Companies that sell goods to the government can increase productivity and hire new workers. Workers have more $$$ to spend in the economy. This increases productivity in other areas. Adds up to more output and more jobs in the economy.

Expansionary Policies By lowering taxes at the same time, the government gives individuals even more money to spend and businesses get to keep more profits.

Assignment Create a graphic organizer which fully depicts the three branch system of government and its impact on fiscal policy. Students must include key terms and definitions(key words). You can be creative with this assignment. This assignment is worth 50pts due at the end of the period.

Contractionary Policies The government uses contractionary policies to discourage economic growth. Contractionary policies are used to try slow down the economy to prevent high inflation that can occur when demand exceeds supply.

The government decreases government spending to lower productivity. Limiting spending by the federal government may lead to slower GDP growth and decreased demand. Decreased demand causes lower prices. Companies cut production and possibly have layoffs. Less output in the economy.

1. Multiplier Effect-expansionary Tools for fiscal policy 1. Multiplier Effect-expansionary Fiscal policy has a multiplier effect on the economy. Expansionary fiscal policy leads to an increase in real GDP larger than the initial rise in aggregate spending caused by the policy. The government spends an additional $4 Billion through discretionary fiscal policy. The total effect on GDP will be larger than $4 Billion. The multiplier effect refers to the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending. Conversely, contractionary fiscal policy leads to a fall in real GDP larger than the initial reduction in aggregate spending caused by the policy.

2. Automatic Stabilizers-contractionary Exist and act on AD before a recession or inflationary trend takes hold Employment insurance and welfare: increased payments during times of economic downturns Help to maintain incomes during recessions (maintain spending) Either slows the leftward shift of AD or shifts curve right Progressive tax: as incomes rise, taxes rise Slows down increases in consumption Stops AD curve from shifting too quickly to the right

So what about Adam Smith and his theory of the Invisible Hand? The Great Depression showed that classical economics was not always practical.

A British economist, John Maynard Keynes proposed the idea that government could and should prevent a depression or recession through the use of taxation and spending. His theory is called Keynesian Economics and it drove American Economic Policy from the 1930s - 1970s.

From the 70s to the present, different Presidential Administrations have a variety of economic policies in an attempt create a balanced budget for the national government. The federal budget is almost never balanced. A budget deficit occurs when expenditures exceed revenues.

The government borrows money by issuing bonds. The national debt is all of the money the government owes to bondholders.

The current national debt is After a brief period of extra money in the national budget in the 1990s, recession, tax cuts, and war have caused massive new deficits in the early 2000s. WOW The current national debt is