1. Ch 15 – Fiscal Policy

2. Pay It Forward Clip
tu.be

3. What is Fiscal Policy?
The tremendous flow of cash in & out of the economy due to government spending & taxing has a large impact on the economy.
Fiscal policy - federal government’s use of taxing and spending to keep the economy stable.

4. Congress & White House work together to develop a federal budget.
Obviously varies from year-to-year but has been running at about $3.8 trillion.
federal budget - written document indicating the amount of money the govt expects to receive for a certain year and then authorizing the amount govt. can spend that year.

5. Fiscal Policy Explained

9. WHERE OUR TAX

10. GDP = C + I + G + (X-M) GDP and fiscal policy Let’s go back to GDP
C=Consumer Spending
I=Investment
G=Government Spending
M = Imports
X = Exports
The total level of government spending can be changed to help increase or decrease the output of the economy.

11. Expand and Contract
Fiscal policies that try to increase output are known as expansionary policies.
Increase government spending
Decrease taxes
Fiscal policies intended to decrease output are called contractionary policies.
Decrease government spending
Increase taxes

12. Government Shutdown
arks_and_rec_budget_final.m4v

13. Effects of Expansionary Fiscal Policy
In short term, govt spending leads to more jobs & more output
Shops & restaurants buy more goods & hire more workers to meet their needs
Workers & investors have more $$ & spend more in shops & restaurants
Companies sells goods to the govt , use $$ to pay workers & investors more & to hire new workers
To expand the economy, the govt buys more goods & services

14. Why it doesn’t always work
Difficulty of Changing Spending Levels
Significant changes must come from the small part of federal budget that includes discretionary spending.
Predicting the Future
Is very difficult & economists often disagree which makes it hard for lawmakers to know when or if to enact changes
Delayed Results
Even when fiscal policy changes are enacted, takes time for changes to take effect.
Political Pressures
Pressures from voters can hinder decisions to cut spending or raising taxes.

15. Need to take into account regional & state economic differences.
Coordination
For fiscal policies to be effective, various branches and levels of govt must plan & work together, which is sometimes difficult.
Need to take into account regional & state economic differences.

16. 3 Economic Schools of Thought
Classical Economics
Keynesian aka Demand Side Economics
Supply Side Economics

17. Classical economics- Idea that markets regulate themselves
Adam Smith, David Ricardo, & Thomas Malthus are all considered classical economists.
Great Depression challenged the ideas of classical economics.

18. KeynesIan
Idea that the economy is composed of three sectors — individuals, businesses, & govt — and that govt. actions can make up for changes in the other two.
Fiscal policy can be used to fight both recession or depression and inflation.
Govt could increase spending during a recession to counteract decrease in consumer spending.
John Maynard Keynes- Among the most influential economists of the 20th century

19. Supply Side Economics AKA: "Reaganomics," or "trickle-down" Economics
Idea that greater tax cuts for investors & entrepreneurs provide incentives to save and invest SO....
Produce economic benefits that trickle down into the overall economy

20. Multiplier Effect of Gov’t Spending
Every dollar change in fiscal policy creates a greater than one dollar change in economic activity.
Govt increases spending by $10 billion
businesses that sold the $10 billion in goods & services to the govt will spend part of their earnings, and so on.
When spending is added up, the initial govt spending leads to an increase of $50 billion in GDP.

21. Combining Monetary & Fiscal Policy
Monetary Policy
Expansionary Tools
use when economy is in a recession
Increase Government spending
Decrease Taxes
Buy Bonds
Reduce RRR
Decrease Discount Rate
Contractionary Tools
Use when economy is expanding too fast
Decrease Government spending
Increase Taxes
Sell Bonds
Increase RRR
Increase Discount Rate

22. budget surplus -revenues exceed spending (expenditures)
Budget Vocabulary:
budget surplus -revenues exceed spending (expenditures)
budget deficit -expenditures exceed revenue
balanced budget -revenues are equal to spending.

23. Debt vs. Deficit:
DEFICIT-amount the federal govt. owes for one fiscal year. Economists often measure the debt as a percent of GDP.
NATIONAL DEBT- total amount of money the govt. owes. (owed to anyone who holds U.S. Savings Bonds or Treasury bills, bonds, or notes)

24. The Debt Clock