Revenues & Expenditures Fiscal Policy Revenues & Expenditures

Essential Standards The student will explain how the government uses fiscal policy to promote price stability, full employment and economic growth. The student will define fiscal policy. The student will explain the government’s taxing and spending decisions. The student will describe the difference between the national debt and government deficits. The student will explain how changes in fiscal policy can impact an individual’s spending and savings choices.

Fiscal Policy Fiscal Policy is determined by two government actions: Collecting revenue. Authorizing expenditures. Both actions are controlled by the… US Congress.

Which of the following is the best example of a decision involving revenue? iRespond Question Multiple Choice F 5A2F7991-D993-664D-AF9B-FE6073A05F5E A.) the EPA passing new limitations on pollution. B.) Congress' decision to raise marginal tax rates to 36%. C.) the President’s support for a new highway-construction bill. D.) a new law that limits the importation of Ecuadoran bananas. E.)

Which of the following is the best example of a decision involving government expenditures? iRespond Question Multiple Choice F 9849458A-0AA0-D648-98C2-B0F7C8E8082B A.) the institution of a "payroll tax holiday" that temporarily cancels social security deductions. B.) the institution of a permanent ban on all US trade with Russia. C.) the elimination of the so-called "death tax" for families with a net worth of less than $1 million. D.) the development of a high-speed rail line between California and Texas. E.)

Expansionary Fiscal Policy Congress uses expansionary policy to raise the GDP… Which can pull the economy out of a recession. To do this, they have two methods: Increase expenditures. Or cut taxes… If the economy is in HORRIBLE shape, Congress might do BOTH.

Contractionary Fiscal Policy Sometimes an economy grows TOO QUICKLY… Which can cause runaway INFLATION. So Congress might use contractionary policy to COOL THINGS OFF. There are two methods: Cut expenditures… Raise taxes.

In terms of fiscal policy, tax cuts are thought to be... iRespond Question Multiple Choice F 30D1513C-8348-054A-918E-04B58C103A21 A.) expansionary B.) contractionary C.) D.) E.)

In terms of fiscal policy, increases in expenditures are thought to be... iRespond Question Multiple Choice F 7F2DCC39-0CB8-C44C-82A5-F6B9B3D144A3 A.) expansionary B.) contractionary C.) D.) E.)

Fiscal Policy: Classical Economics Was the philosophy in the US from 1776 through 1932— It is based on the ideas of Adam Smith… When the economy is in trouble… The government should DO NOTHING… Keep its HANDS OFF, and the “invisible hand” would fix any problems. But the Great Depression (1929-1947) raised this question: HOW LONG DOES IT TAKE FOR THE INVISIBLE HAND TO GET BUSY?

Demand Side (Keynesian) Economics Was developed in the 1930’s by British economist John Maynard Keynes… Who argued that the government was PART of the economy… And in times of recession or depression… The government should INCREASE EXPENDITURES… Build bridges, highways, hospitals, schools, airports, dams, etc… Which would CREATE JOBS… And pull the economy OUT OF TROUBLE.

Supply-Side Economics Supply-siders believe that taxes HURT the economy. And in times of recession or depression, TAX CUTS are essential. Tax cuts increase demand… Which increases business profits… Which causes businesses to hire more workers… And the government collects MORE MONEY… Even though tax rates are LOWER.

A.) classical economics. In reaction to an economic downturn, Congress announces a package of massive tax cuts. Such a policy is in line with... iRespond Question Multiple Choice F C02D47C4-0FA7-7C46-A1C4-EE780AEA83E0 A.) classical economics. B.) supply side economics. C.) demand side economics D.) E.)

A.) classical economics. In reaction to an economic downturn, Congress passes a stimulus package that includes billions of dollars in funding for highway construction. Such a policy is in line with... iRespond Question Multiple Choice F A41C73C6-033C-F242-9411-A4A8D82CB0FB A.) classical economics. B.) supply side economics. C.) demand side economics. D.) E.)

Do These Policies Work? Keynesian (or Demand-Side) Economics calls for increased SPENDING during recessions… But where is that money supposed to come from? Keynesian doctrine also calls for SAVING during expansions. However, the government is never able to achieve the discipline necessary to SAVE when the economy is strong… So when the economy takes a downturn, the government is forced to BORROW MONEY, which increases the NATIONAL DEBT. Supply-siders call for TAX CUTS when the economy is in recession… But if the government REDUCES its revenues, it must keep spending under control… However, out-of-control spending has become the US government’s trademark… Which forces the government to BORROW MONEY, which increases the NATIONAL DEBT. So although both theories look good on paper, they have actually never worked in practice.

Surpluses & Deficits Budget deficit—expenditures EXCEED revenues. Budget surplus—revenues EXCEED expenditures… The US has been running a deficit for the last several years… Leading to a huge national debt.

The National Debt Is the total amount of money the federal government owes to bondholders. Every year that the government runs a deficit, it must borrow money to operate. To borrow money, the government sells US Bonds (they are sometimes called SECURITIES). Individuals and nations all over the world buy them… Because they are viewed as some of the safest in the world… The US is stable and has never defaulted on its debt.

Your personal share (if you are a US citizen) is… The National Debt, as of 02 November, was…. Your personal share (if you are a US citizen) is… $51,824.57 Since September 28, 2007, the National Debt has increased by a DAILY average of… $3.09 BILLION

Government Spending National Defense—20%. “Spending reductions would put our troops in harm’s way.” Social Security—20%. “Social Security is the ‘third rail’ of American politics.” Medicare & Medicaid—20%. “We can’t balance the budget by refusing to care for the sick”. Safety Net Programs—20%. “We’re going to balance the budget on the backs of the ‘most vulnerable’ members of society? NO.” Interest on the national debt—10%. Failure to pay interest would result in default, causing an economic catastrophe. And the rest is peanuts.

Why is the National Debt a Problem? If I give a loan to a person I think is a HIGH RISK borrower… I will demand a high rate of interest to compensate for that risk. Historically, the US government was considered LOW RISK… And was only required to pay LOW RATES of interest. However, our skyrocketing national debt has started to make lenders NERVOUS… So they have started to require HIGHER rates of interest. But high interest rates cause the debt to increase MORE RAPIDLY… Which makes lenders MORE NERVOUS… And so on.

How Do We Fix The Problem? Debt can be paid down by two methods: Decreasing expenditures… Or increasing taxes. However, this action exactly matches WHICH fiscal policy? CONTRACTIONARY POLICY. Can we afford to undertake such a policy at this particular point? So what should we do?