Fiscal Policy
Chapter 15
Fiscal Policy Stabilization Policy: to prevent
recession, depression, inflation, stagflation Fiscal policy Monetary policy
Fisc: ‘basket’ or bag; pool of money Fiscal Policy
Government spending and taxing to influence the economy
Fiscal Policy Influences aggregate demand Federal Budget: a plan for the federal
government’s revenues and spending for the upcoming year Fiscal year: Oct. 1 to Sept. 30
Spending Proposals Executive Branch: Office of
Management and Budget (OMB) Legislative Branch: Congressional
Budget Office (CBO)
Congress House
House Budget Committee
Binding Resolution Appropriations
Committee
Passes Both: President
Senate Senate Budget
Committee Binding Resolution Appropriations
Committee
Fiscal Policy Economic Situation - Recession
Expansionary policy Increase G Decrease T
Increases AD
Economic Situation Inflation
Contractionary policy Decrease G Increase T
Decreases AD
Limits of Fiscal Policy Difficult to change spending levels Difficult to predict the future Delayed results
Time lags Recognition lags
Political pressures Coordinating fiscal policy
Fiscal Policy Options Classical Economics Keynesian Economics Supply Side (Reagonomics)
Classical Economics Adam Smith, David Ricardo, Thomas
Malthus Laissez Faire economics No market regulation
Keynesian Economics John Maynard Keynes 1936: The General Theory of Employment,
Interest, and Money Productivity capacity: full employment output
Demand side economics Government spending Taxation
Avoiding recessions & depressions Control inflation Countercyclical actions by government
Multiplier Effect Idea that every one dollar of government
spending creates more than one dollar in economic activity
Automatic Stabilizers Transfer payments: unemployment
benefits; Temporary Assistance for Needy Families (TANF)
Supply Side Economics Laffer Curve
Fiscal Policy & American History 1930 - Great Depression, WWII:
Keynesian economics 1960 - Keynesian economics 1980 - Reagonomics (supply side
economics) 2008 - 10 Keynesian economics
Obama’s stimulus package
Budget Deficits and the National Debt Budget Balance
DeficitRevenue < Spending
SurplusRevenue > Spending
Budget Deficits Responds
Print moneyhyperinflation
Borrow moneyTreasury bills- short term Treasury notes - 2 to 10 yearsTreasury bonds - 10 - 30 years
National Debt Each year’s deficit adds to the national
debt Crowding out effect Servicing the debt
discretionary spending
Deficits, Surpluses and National Debt mid 1980: Gramm Rudman Hollings Act -
automatic across the board cuts unconstitutional
Late 1990: surplus Clinton: increased taxes; reduced Government
spending Surplus options: new spending, reduce taxes,
stabilize social security 2000: deficit
War Reduced taxes Increased spending
Debt Commission 2010 Rough draft proposal to end projected deficits by
2020 Cut
defense spending Social security benefits Medicare Change calculations for CPI
Adjust social security -- independent of debt Retire at 70
Raise taxes by ending deductions Home mortgage interest rate deduction End business deduction for health costs Increase gas tax Changes in capital gains tax (?)
Lower overall tax rate
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