1. Fiscal Policy, Deficits, and Debt Chapter 30 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 30-2 Chapter Objectives Purposes, tools, and limitations of fiscal policy Built-in stabilizers and the business cycle The standardized budget and U.S. fiscal policy U.S. public debt

3. 30-3 Fiscal Policy Council of Economic Advisers (CEA) Discretionary fiscal policy –Eliminate recessionary or inflationary gap –Countercyclical Nondiscretionary fiscal policy –Passive or automatic

4. 30-4 Expansionary fiscal policy –Increased spending and/or lower taxes –Budget deficit Contractionary fiscal policy –Lower spending and/or higher taxes –Budget surplus Policy options? Fiscal Policy

5. 30-5 Expansionary Fiscal Policy Real Domestic Output, GDP Price Level AD 2 Recessions Decrease Aggregate Demand AD 1 $5 Billion Additional Spending Full $20 Billion Increase in Aggregate Demand AS $490$510 P1P1

6. 30-6 Contractionary Fiscal Policy Real Domestic Output, GDP Price Level AD 3 Reduce Demand Pull Inflation AD 4 $5 Billion Initial Decrease In Spending Full $20 Billion Decrease in Aggregate Demand AS $510$522 P1P1

7. 30-7 Built-In Stability Automatic stabilizers –Taxes and transfers Economic importance Tax progressivity –Progressive tax system –Proportional tax system –Regressive tax system

8. 30-8 Standardized Budget Balance Percentage of Potential GDP, 2007 Source: Organization for Economic Cooperation and Development Denmark New Zealand Ireland Canada Norway France United States United Kingdom Japan -6-4-20246 Deficits Surpluses

9. 30-9 Federal Budget Balance Actual and Projected, Fiscal 1994-2014 Source: Congressional Budget Office $300 200 100 0 -100 -200 -300 -400 -500 Budget Deficit (-) or Surplus, Billions 19941996199820002002200420062008201020122014 ActualProjected(as of March 2008)