Fiscal Policy UNIT 6 Chapter 15

What is fiscal policy? Fiscal – refers to anything having to do with gov’t revenue, spending and debt. Fiscal policy – how the government uses taxes and gov’t spending to affect the economy and keep it stable. Used to FIGHT INFLATION or INCREASE AGGREGATE DEMAND

Automatic Stabilizers – automatically stabilize the economy. Types of Fiscal Policy The total level of government spending can be changed to help increase or decrease the output of the economy. Discretionary Fiscal Policy – the government can choose different taxing and spending methods to regulate the economy. (Requires legislation) Automatic Stabilizers – automatically stabilize the economy. Public transfer payments – entitlements Progressive income taxes – work to keep increased income from entering the economy.

Expansionary vs. Contractionary Fiscal Policy The government has two tools to work with… Taxes Spending Expansionary vs. Contractionary Fiscal Policy Used to increase the level of AD in weak economy. Used to decrease the level of AD in an economy growing too quickly.

Expansionary Fiscal Policy Works to increase AD Causes price level to rise Firms have incentive to produce more Unemployment falls DECREASE TAXES INCREASE GOV’T SPENDING SOME COMBINATION

Expansionary Policy

Contractionary Fiscal Policy Decrease AD In these cases AD can be > AS which leads to increasing price level Weakens the purchasing power of the dollar INCREASE TAXES DECREASE SPENDING COMBINATION

Contractionary Policy

LIMITATIONS OF FISCAL POLICY LAG COORDINATION WITH THE BUSINESS CYCLE RATIONAL EXPECTATIONS THEORY GEOGRAPHY

DEMAND-SIDE ECONOMICS Historically economists believed the gov’t should stay out of the economy Great Depression changed this Keynesian Economics – Keynes is responsible for GDP=C+I+G+F Focused on the Investment part Spending Multiplier Effect Keynes is “father” of Macroeconomics

Supply-Side Economics Provide incentives to producers to increase AS Cut production costs to encourage producers to supply more Lower taxes Spending cuts Decreased regulation REAGONOMICS – “TRICKLE DOWN”

Reaganomics vs. Obamanomics http://www.youtube.com/watch?v=iloAxFLWaT0

Laffer Curve

Federal Deficit and Debt

Federal Spending Balanced Budget Budget Surplus Budget Deficit Refers to 1 year

Causes of Budget Deficits National Emergencies Public Goods and Services Fiscal Policies Entitlements

How does the gov’t raise money for deficit spending? Savings Bonds T-Bills Treasury Notes Treasury Bonds http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

National Debt Money owed to holders of these bonds plus interest Money borrowed from trust funds – SS, Medicare, Medicaid (although some don’t see this as actual debt)

National Debt http://www.usdebtclock.org/#

Attempting to Control the Deficit and Debt http://www.cnn.com/video/#/video/bestoftv/2012/11/24/exp-fiscal-cliff.cnn