1. Using Fiscal Policy

2.   Fiscal Policy is the federal government’s use of taxes and government spending to affect the economy.  There are three primary types:  Expansionary Fiscal Policy is a plan to increase aggregate demand and stimulate the economy.  Contractionary Fiscal Policy is a plan to reduce aggregate demand and slow the economy.  Discretionary Fiscal Policy refers to actions selected by the government to stabilize the economy. Fiscal Policy

3.   There are a few tools used frequently by the government to quickly stabilize the economy (automatic stabilizers).  1. Public Transfer Payments (the more the pay, the less they have to spend)  2. Progressive Income Taxes (Income tax) Overall Goal = Stability

4.   Used to increase Aggregate Demand.  Causes prices to rise.  Provides incentives to businesses in order to increase GDP.  There is a decrease in unemployment, increase in government spending, and/or a decrease in taxes. Expansionary Fiscal Policy

6.   Used to reduce inflation or when the economy is growing too rapidly.  Decrease in government spending and an increase in taxes in order to control inflation.  Creates a trickle down effect where people have less money to spend so they do not over buy items. Contractionary Fiscal Policy

9.   #1 Policy Lags: Congress can take longer than needed to act.  #2 Timing Issues: It has to match up with the business cycle.  #3 Rational Expectations Theory: This accounts for people acting ahead of time because they predict coming changes.  #4 Political Issues: Often times leaders act to get reelected not always to provide the best answer.  #5 Regional Issues: Not all parts of a country may face the same economic issues. Limitations of Fiscal Policy

10.  Demand-Side and Supply-Side Policies

11.   Developed from the ideas of economist John Maynard Keynes who believed economic issues should be solved with government action.  The focus is to increase aggregate demand as a way of improving the economy. Demand-Side Economics

12.   Keynes believed that changes in demand influenced the business cycle.  He focused on investment as the key out of the GDP equation.  By increasing investment, Keynes believed that there would be a spending multiplier effect where a small change would have a great impact. Keynesian Theory

13.   With Demand-Side Fiscal Policy, the government must make choices to increase demand and control inflation.  Keynes proposed a highly active government that used and expansionary policy to seek full employment.  The downside is although this works for recovery, it is hard to slow down after the recovery. Government and the Demand-Side

14.   The goal of supply-side policies is to provide incentives to producers to increase aggregate supply.  Supply-Side economics favors less government involvement in the areas of taxation, spending, and regulation. Supply-Side Economics

15.   The Laffer Curve is a graph that illustrates the economist Arthur Laffer’s theory of how tax cuts affect tax revenues.  The idea is that when taxes go beyond a certain point, revenue decreases because people lose the incentive to work. The Laffer Curve and its’ Effects

17.  Deficits and the National Debt

18.   A budget surplus is when the government takes in more revenue tan it spends and budget deficit is the opposite.  Deficit Spending is the government practice of spending more money than it takes in a given year. The growing annual deficits add up to the national debt.  http://www.usdebtclock.org/ Federal Deficit and Debt

20.   #1 National Emergencies  #2 Need for Public Goods and Services (ex. Infrastructure)  #3 Stabilization of the Economy: Government Programs and Bail Outs  #4 Role of Government in Society (ex. Social Security) Causes of Deficit

21.   When the government does not receive enough revenue it can borrow in 3 forms.  #1 Treasury bills mature in less than 1 year  #2 Treasury notes mature between 2 and 10 years  #3 Treasury bonds mature in 30 years Money for Deficit Spending

25.   One major effect is the crowding out effect where the government owns more in bonds than private owners do. Effect of the Debt on the Economy