Fiscal Policy If your family or you made a budget to calculate family expenses than you are practicing a key IDEA that is related to Fiscal Policy = Balancing a Budget The Federal Budget is the amount of money the government expects to receive from taxes each year. Fiscal year = A 12 month time period the government uses for the federal budget. It runs from October 1 – September 30.

Tools of Fiscal Policy 1. Expansionary Fiscal Policy A. Used to encourage economic growth and take the U.S. out of a recession. B. 2 Ways to Promote Growth 1. Increasing Government Spending 2. Cutting Taxes

Expansionary 1. Government Spending = Creates more jobs and increases Aggregate Demand which causes prices to rise. Ultimately, this leads to an increase in output and lower unemployment

A B C D

Expansionary Fiscal Policy 2. Cutting Taxes = Consumers and Businesses have more money to spend and invest.

Contractionary Fiscal Policy Attempts by the government to decrease aggregate demand and slow the growth of the economy. This is done to avoid INFLATION because demand is growing ahead of supply and businesses to not want to Increase Prices to keep up. 2 ways: A. Decrease Government Spending B. Increasing Taxes

Which one is contractionary?

Fiscal Policy: Why do we use it? Before the Great Depression, America followed the classic economic model – Adam Smith Idea that supply and demand will return to equilibrium. BUT, this model was upset by the Great Depression.

Developed by Economist, John Keynes – Believed that all 3 connected to fight recessions and inflation periods Businesses Government Individuals

Keynes believed the Government was the key to helping America out of recessions by SPENDING until the private sector starts to feel confident and spends again. During the Great Depression this was done by the New Deal

What really took us out of the Depression? WORLD WAR II

Fiscal Policy is Related to Budgets Does the United States have a debt?

U.S. Debt

Budget = Basic tool of Fiscal Policy Made up of 2 parts: 1. Revenue (taxes) 2. Expenditures (spending programs) When the Govt’s revenues equal its expenditures the government has a balanced budget! However, the fed. Budget is almost never balanced.

The federal budget is usually never balanced. It is either experiencing a surplus or a deficit. Budget surplus – When revenues exceed expenditures. More money going into the Treasury! Budget deficit – When the government spends more than it is receiving. More money going OUT of the Treasury than coming in.

Recent History of Both

Deficits and Surpluses are linked to government spending and taxes. Therefore, they are constantly shaped by outside pressures – recessions, wars, paying for Social Security, etc.

Responding to Government Deficits 1 Create more money and put more money into circulation = increases demands for goods and services. 2. Borrow money = Selling Bonds

Deficit Vs. Debt Deficits occur when the government must borrow money for one years budget if there is not enough money. National debt = The sum of all the government borrowing from the Revolutionary War until today MINUS the borrowing that have been repaid.

National Debt Our Debt is Large, HOWEVER, when you measure it as a percentage of GDP we gain a better picture of its significance. Usually, debt will rise during wartime and decrease during peacetime, but in the 1980’s this changed as government spending increased and taxes lowered.

Debating the National Debt Over 9 Trillion and climbing