Fiscal Policy

Fiscal Policy - the use of government spending (expenditures) and revenue collection (taxes) to influence the economy. 1. Congress’s Role - Fiscal Policy is controlled primarily by Congress because they create the budget for the United States every year. 2. The President’s Role - Every year the President proposes his own version of the budget and asks Congress to pass his legislative ideas. However, the President can’t make Congress do what he/she wants. The only real power the President has over the budget is through the act of signing the budget into law or vetoing the budget. 3. Fiscal policy can have a tremendous impact on aggregate demand and aggregate supply.

Uses Uses of Fiscal Policy 1.To promote economic growth 2.To achieve full employment 3.To create price stability

Key Budget Terms a. Balanced Budget – A budget in which revenue (taxes) and expenditures (spending) are equal b. Budget Surplus - A budget in which more money is collected in taxes than is spent by the government. c. Budget Deficit – A budget in which less money is collected in taxes than is spent by the government. The deficit must be covered by selling government securities (savings bonds and treasury notes) d. The National Debt – the amount of money that remains unpaid from the current budget deficit and all previous federal budget deficits.

Types of Fiscal Policy A. Expansionary Fiscal Policy - A fiscal policy that tries to increase output (real GDP). 1. Used to fight recessions and contractions in the Business Cycle by lowering taxes and increasing government spending. B. Contractionary or Restrictive Fiscal Policy - A fiscal policy that tries to decrease output (real GDP). 1. Used to fight inflation and low unemployment by raising taxes and decreasing government spending.

Limits A.Difficulty Changing Spending Levels (60% of the Federal Budget is Fixed by Law and cannot be changed without amending or appealing those laws. Programs included in this 60% include Medicaid, Social Security, and Veterans' benefits.) B. Predicting the Future of the Economy Is Hard C. Delayed Results - Results of Fiscal actions may not be known for 1 year or more. D. Political Pressure - Doing the right thing may cost a politician their job. E. The Branches of Government Must Work Together

Fiscal Policy Options A.Keynesian Economics (The ideas of John Maynard Keynes) 1.Demand-Side Economics – the idea that government spending and tax cuts help an economy by increasing aggregate demand. 2.The Multiplier Effect - the idea that every one dollar of government spending creates more than one dollar in economic activity. 3.Automatic Stabilizers - government programs and taxes that automatically adjust depending on changes in real GDP and personal income.

Supply Side Economics B.Supply-Side Economics – the belief that taxes have strong negative effects on real GDP. Supply siders believe that lowering taxes helps to stimulate aggregate supply. They also believe that taxes can sometimes be lowered without hurting government revenue.

Laffer Curve: A curved graph that illustrates the theory that, if tax rates rise beyond a certain level, they discourage economic growth, thereby reducing government revenues.