1. Fiscal Policy Macroeconomics
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2. Fiscal Policy
Fiscal policy is the use of changes in taxes and government expenditure to influence aggregate demand and thus the level of economic activity
Since most states in the U.S. are statutorily required to run balanced budgets, fiscal policy usually refers to spending and tax changes by the federal government

3. Government and Aggregate Demand
Government expenditures and tax revenues are the two sides of the government budget
Government expenditure, that is, government spending on goods and services, is a component of aggregate demand
Tax rates affect either consumption or investment expenditure, which are components of aggregate demand

4. Strategies in Fiscal Policy
Expansionary policy attempts to increase aggregate demand
Contractionary policy attempts to decrease aggregate demand

5. Federal Budgets
When the federal government spends more money than it receives in taxes in a given year, it runs a budget deficit
Conversely, when the government receives more money in taxes than it spends in a year, it runs a budget surplus
If government spending and taxes are equal, it is said to have a balanced budget

6. Federal Spending, 1960–2010 as a Percentage of GDP
Source: Economic Report of the President, Tables B-80 and B-1,

7. What does the Federal Government Spend Money on?
(Source: Economic Report of the President, Table B-80,

8. What about the other 29%? international affairs science and technology
natural resources and the environment
Transportation
Housing
Education
income support for the poor
community and regional development
law enforcement and the judicial system
the administrative costs of running the government

9. Federal Taxes
(Source:Economic Report of the President, Tables B-81 and B-1, detail.html)

10. Local and State Spending
Source: Economic Report of the President, Tables B-86 and B-1, in Principles of Macroeconomics Chapter 17.1. Authored by: OpenStax College. Provided by: Rice University. Located BY: Attribution. License Terms: Download for free at

11. What do States Spend Money on?
Education accounts for about one-third of the total
Highways
Libraries
hospitals and healthcare
parks
police and fire protection

12. Revenue Sources for State and Local Government:
sales taxes
property taxes
revenue passed along from the federal government
personal and corporate income taxes
fees and charges

13. A Healthy, Growing Economy
In this well-functioning economy, each year aggregate supply and aggregate demand shift to the right so that the economy proceeds from equilibrium E0 to E1 to E2. Each year, the economy produces at potential GDP with only a small inflationary increase in the price level. But if aggregate demand does not smoothly shift to the right and match increases in aggregate supply, growth with deflation can develop
Principles of Macroeconomics Chapter 17.4. Authored by: OpenStax College. Provided by: Rice University. Located BY: Attribution. License Terms: Download for free at

14. Expansionary Fiscal Policy to Fight Unemployment
Expansionary fiscal policy, such as tax cuts to stimulate consumption and investment, or direct increases in government spending shifts the aggregate demand curve to the right
Principles of Macroeconomics 12.3. Authored by: OpenStax College. Provided by: Rice University. Located BY: Attribution. License Terms: Download for free at

15. Contractionary Fiscal Policy to Fight Inflation
Contractionary fiscal policy uses tax increases or government spending cuts to shift AD to the left. The result would be downward pressure on the price level, but very little reduction in output or very little rise in unemployment
Principles of Macroeconomics 12.3. Authored by: OpenStax College. Provided by: Rice University. Located BY: Attribution. License Terms: Download for free at

16. Automatic Stabilizer
A government program that tends to reduce fluctuations in GDP automatically is called an automatic stabilizer
It increases GDP when it is falling and reduce GDP when it is rising
Changes in expenditures and taxes that occur through automatic stabilizers do not shift the aggregate demand curve

17. Discretionary Spending
Discretionary government spending and tax policies can be used to shift aggregate demand
Expansionary fiscal policy might consist of an increase in government purchases or transfer payments, a reduction in taxes, or a combination of these tools to shift the aggregate demand curve to the right
A contractionary fiscal policy might involve a reduction in government purchases or transfer payments, an increase in taxes, or a mix of all three to shift the aggregate demand curve to the left

18. Expansionary and Contractionary Fiscal Policies to Shift Aggregate Demand
Principles of Macroeconomics Chapter 12.2. Authored by: Anonymous. Located at:  BY-NC-SA: Attribution-NonCommercial-ShareAlike

19. An Increase in Government Purchases
Principles of Macroeconomics Chapter 12.2. Authored by: Anonymous. Located at:  BY-NC-SA: Attribution-NonCommercial-ShareAlike

20. Policy Response to Inflationary Gap
Year
Situation
Policy response
1968
Inflationary gap
A temporary tax increase, first recommended by President Johnson’s Council of Economic Advisers in 1965, goes into effect. This one-time surcharge of 10% is added to individual income tax liabilities
1969
President Nixon, facing a continued inflationary gap, orders cuts in government purchases
Principles of Macroeconomics Chapter 12.2. Authored by: Anonymous. Located at:  BY-NC-SA: Attribution-NonCommercial-ShareAlike

21. Policy Responses to Recessionary Gaps
1975
President Ford, facing a recession induced by an OPEC oil-price increase, proposes a temporary 10% tax cut. It is passed almost immediately and goes into effect within two months.
1981
President Reagan had campaigned on a platform of increased defense spending and a sharp cut in income taxes. The tax cuts are approved in 1981 and are implemented over a period of three years. The increased defense spending begins in While the Reagan administration rejects the use of fiscal policy as a stabilization tool, its policies tend to increase aggregate demand early in the 1980s.
1992
President Bush had rejected the use of expansionary fiscal policy during the recession of 1990–1991. Indeed, he agreed late in 1990 to a cut in government purchases and a tax increase. In a campaign year, however, he orders a cut in withholding rates designed to increase disposable personal income in 1992 and to boost consumption.
1993
President Clinton calls for a $16-billion jobs package consisting of increased government purchases and tax cuts aimed at stimulating investment. The president says the plan will create 500,000 new jobs. The measure is rejected by Congress.
2001
President Bush campaigned to reduce taxes in order to reduce the size of government and encourage long-term growth. When he took office in 2001, the economy was weak and the $1.35-billion tax cut was aimed at both long-term tax relief and at stimulating the economy in the short term. It included, for example, a personal income tax rebate of $300 to $600 per household. With unemployment still high a couple of years into the expansion, another tax cut was passed in 2003.
2008
Fiscal stimulus package of $150 billion to spur economy. It included $100 billion in tax rebates and $50 in tax cuts for businesses.
2009
Fiscal stimulus package of $787 billion included tax cuts and increased government spending passed in early days of President Obama’s administration.
Principles of Macroeconomics Chapter 12.2. Authored by: Anonymous. Located at:  BY-NC-SA: Attribution-NonCommercial-ShareAlike

22. Practice Question
What are some examples of automatic stabilizers that have contractionary and expansionary impacts?
Contractionary: Income taxes rise automatically as incomes rise so they help avoid inflation
Expansionary: unemployment payments, Food stamps, WIC, TANF all increase when the economy is poor

23. Quick Review
What are the major spending categories and major revenue sources in the U.S. Federal budget?
What are the major spending categories and major revenue sources in U.S. state and local budgets?
What is fiscal policy? What are the roles of tax rates and government spending?
What is the difference between discretionary and automatic fiscal policy?
Compare and contrast expansionary/contractionary fiscal policies?
How do tax changes and government spending changes work?