1. Fiscal Policy Chapter 15

2. Setting Fiscal Policy: The Federal Budget  $7.7 Billion a day spent by government  Fiscal Policy is the use of government spending and revenue collection to influence the economy

3. Federal Budget Basics  Fiscal year is any 12 month period used for budgeting purposes.  October 1 st thru September 30 th

4. The Four Steps  Agencies write spending proposals  The Executive Branch Creates a Budget  Congress Debates and Compromises  President approves

5. The Economic Cycles  Expansionary Policy Increased government spending Decreases taxes Or both  Contractionary Policy Decrease spending Increase taxes Or both

6. Limits of Fiscal Policy  Difficulty of changing spending levels  Predicting the future  Delayed results  Political pressures  Coordinating fiscal policy

7. Fiscal Policy Options Chapter 15 Section 2

8. Classical Economics  Adam Smith  Self-interest, leads to regulation of the market and equilibrium.  Prices and supply and demand all work together  Does not address a time frame!!!

9. Keynesian Economics  John Maynard Keynes (CANES)  The General Theory of Employment, Interest, and Money (1936) Wants to have government intervene during economic downfalls

10. Keynesian Economics  Productive Capacity is the maximum output that an economy can sustain over a period of time without increasing inflation Must find a way to increase demand to get out of the depression

11.  Federal government must spend enough to increase demand, and once recovered back out. Demand-Side Economics

12. Avoiding Recession  FDR uses expansionary fiscal policy through the New Deal This principle still divides the political parties today. Republicans = tax cuts Democrats = expansive government programs

13. Automatic Stabilizers  A tool of fiscal policy that increases or decreases automatically depending on changes in GDP or personal income  This has helped stabilize the overall economy by not allowing such large fluctuations in real GDP from year to year

14. Supply Side Economics  A school of thought based on the idea that the supply of goods drives the economy

15. The Laffer Curve  Shows the relationship between tax rate and total tax revenue

16. Taxes and Output  The heart of supply side argument is that a tax cut increases total employment  Thus even with lower taxes more people work and more tax revenue is brought in

17. Fiscal Policy in American History  WWII = Keynesian used and worked  Post WWII = tax cuts during recession of 1960s. Highest individual income tax was 90%

18. Fiscal Policy in American History  1980s Reagan cuts taxes and spending, moving to supply side economic ideas. Improves economy Leads to an ever increasing deficit

19. Fiscal Policy in American History  President Obama elected in 2008 and proposed to increase government spending to repair nation’s infrastructure

20. Budget Deficits and the National Debt Chapter 15 Section 3

21. Balancing the Budget  Has not been balanced in decades, almost always a surplus or a deficit.  The total deficit for fiscal year 2009 was $1.42 trillion, previous record $413 Billion in 2004 This is partially political

22. How to fix a deficit  Create Money For small deficits can be fixed by creating money (print of electric) Can lead to inflation  Borrow Money Borrows money by selling bonds

23. The National Debt  Deficit is amount of money borrowed for one fiscal year  Debt is the total money borrowed from before the fiscal year.

24. Measuring National Debt  $10.6 trillion in 2008  $12.9 trillion 2010  http://www.brillig.com/debt_clock/ http://www.brillig.com/debt_clock/

25. Is the Debt a Problem?  Reduces investment funds  Interest payments to bondholders  Foreign ownership of national debt  25% of debt held by foreign countries

26. Homework  #3-6 on pages 398, 407, and 414