Chapter 15

 Setting Fiscal Policy: The Federal Budget  Fiscal year  Agencies write proposals (OMB)  Executive Branch creates a budget  Congress debates and compromises

 Fiscal Policy and the Economy  Expansionary Fiscal Policy ▪ Encourages growth through increased spending or tax cuts  Contractionary Fiscal Policy ▪ Reduce growth through decreased spending or higher taxes

 Limits of Fiscal Policy  Difficulty of Changing Spending Levels  Predicting the Future  Delayed Results  Political Pressures  Coordinating Fiscal Policy

 Classical Economics  Markets regulate themselves; Adam Smith  Keynesian Economics  John Maynard Keynes  Demand-side economics; encourages govt action  Use fiscal policy to avoid recession and inflation  The Multiplier Effect  Automatic Stablilizers ▪ Taxes and transfer payments(entitlements)

 Supply-Side Economics  Reagan  Focus on taxes  Laffer Curve  Lower taxes = increase output

 Balancing the Budget  Surplus vs Deficit ▪ Creating money ▪ Borrowing money (T-Bills, T-Notes, T-Bonds)  The National Debt  Total amount the govt owes to bondholders  Sum of all borrowing

 Is the Debt a Problem?  Crowding-Out Effect  Repay with interest  In-debt to other countries (national security)