Economics Fiscal Policy

Fiscal Policy Fiscal Policy is the use of government spending and revenue collection to influence the economy For example the government spends about $2 - 3 trillion each year $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

Fiscal Policy Fiscal policies are used to achieve economic growth, full employment, and stabilize inflation

Fiscal Policy The Federal Budget : is a yearly plan for the federal government’s revenues and spending for the upcoming year

Federal Budget Timeline: All federal agencies request money (Feb) The President requests money for his budgetary needs The Office of Management and Budget works to create a budget (OMB)

Federal Budget Congress makes any changes (Aug – Oct) Appropriation bills are debated Defense, education, science, infrastructure… The President can sign the budget or veto it

Fiscal Policy and the Economy Fiscal Policy is used to increase or decrease the output of the economy Expansionary policies are used to increase output if the economy is in a recession Contractionary policies are used to decrease output during times of rapid growth or high inflation

Expansionary Fiscal Policies Can be used to encourage growth when the economy is in a recession or to try and prevent a recession Government spends money to increase the economy The government buys goods or services TARP: Troubled Asset Relief Program

Expansionary Fiscal Policies Government spends money and… Companies that sell goods to the gov’t earn profits and may hire more workers Workers have more money to spend Shops and restaurants buy more goods Spending leads to more jobs and more output

Expansionary Fiscal Policies Gov’t implements expansionary policies: Reducing Taxes Individuals have more money in their paychecks Businesses keep more of their profits Consumers and firms have more money to spend on land, labor and capital

Contractionary Fiscal Policies Can be used to decrease demand and this reduces the growth of economic output When demand exceeds supply, producers must choose between raising output and raising prices. If they cannot expand production they will raise prices and that leads to inflation

Contractionary Fiscal Policies Government implements contractionary policies: Decrease Government spending Increase tax rates on individuals and businesses

Limits of Fiscal Policies Hard to predict business cycles How quickly will they change Hard to predict future of the economy Economic Indicators Hard to predict future behavior of individual consumers

Limits of Fiscal Policies Hard to predict behavior of consumers Fads, trends, future expectations, etc…

Limits of Fiscal Policies Delayed results: Implementing changes takes time May take one to two years to fully implement changes Consumers and firms may not be able to change quickly

Limits of Fiscal Policies Before the changes in policy take effect, the economy may already be moving in the opposite direction Ex. Government plans massive spending on highways during a recession, only to have the economy recover before construction begins.

Limits of Fiscal Policies Government officials might wish to be re-elected Voters like expansionary policies Public may not be educated about Fiscal Policy: Ex. Voters may like to see less government spending (contractionary) and lower taxes (expansionary) implemented at the same time!