Unit 7 Macroeconomics: Taxes, Fiscal, and Monetary Policies Chapters 15.1

1. Unit 7 Macroeconomics: Taxes, Fiscal, and Monetary Policies Chapters 15.1 Economics Mr. Biggs

2. Understanding Fiscal Policy Fiscal policy - The use of government spending and revenue collection to influence the economy. Fiscal Policy as a Tool Government fiscal policies are used to achieve economic growth, full employment, and price stability. How much to spend and how much to tax are among the most important decisions the federal government makes.

3. The Federal Budget • Federal budget - A plan for the federal government’s revenues and spending for the coming years. • The federal government prepares a new • budget for each fiscal year. • Fiscal year - A 12 month period that • can begin on any date. • The federal government’s fiscal year runs from October 1st through September 30th. Spending Proposals Before each budget, federal agencies write a detailed estimate of how much they expect to spend in the next fiscal year. This information is submitted to the Office of Management and Budget (OMB). Office of Management and Budget (OMB) - A government office that manages the federal budget.

4. In the Executive Branch • The OMB holds meetings with the President’s staff to finalize the budget proposal. • The OMB then writes a single budget document that gives the President an overall spending plan for the coming year. In Congress The proposed budget goes to Congress for review and debate with the help of the CBO. Congressional Budget Office (CBO) - Government agency that provides economic data to Congress. Congressional budget committees submit appropriation billsto authorize spending for specific government programs. Appropriation bills - A bill that sets money aside for specific spending. The government may shut down if the President and the Congress do not agree on a budget.

5. In the White House • Once the Congress and President agree, the President signs the new budget into law. Fiscal Policy and the Economy The total level of government spending and/or taxation can be increased or decreased to change the output of the economy. Expansionary policies - Fiscal policies, like higher spending and tax cuts, that encourage economic growth. Contractionary policies - Fiscal policies, like lower spending and higher taxes, that reduce economic growth.

6. Expansionary Fiscal Policies • Expansionary policies are used when the government wants the economy to grow or to help prevent a recession. • Governments can increase spending and/or cut taxes. • Increasing Government Spending • If government spending increases, it increases aggregate demand, increases prices, and causes businesses to produce more, which leads to the creation of jobs. • Cutting Taxes • Cutting taxes puts more money in the hands of consumers and businesses. • This triggers a similar chain of events as increased government spending.

7. Contractionary Fiscal Policies Contractionary policies try to decrease aggregate demand and reduce the growth of economic output in order to fight inflation. • Governments can decrease spending • and/or increase taxes. Decreasing Government Spending Decreasing government spending decreases aggregate demand, lowers prices, lowers production, and slows down the economy. Increasing Taxes • Increasing taxes triggers a similar chain of events as decreased government spending.

8. Limits of Fiscal Policy Fiscal policies can be clumsy and difficult to put into practice. Difficulty of Changing Spending Levels Entitlement programs cannot be touched and are biggest part of the federal budget. Increases and decreases in spending must come from discretionary spending. Discretionary spending is approximately 39% of the total federal government spending. Predicting the Future No one can predict how quickly the business cycle will move from one stage to the next. No one can identify exactly where the economy is at any specific point in the cycle either.

9. Delayed Results • By the time fiscal policy begins affecting the • economy (1 to 2 years), the economy may • be moving in the opposite direction. • Political Pressures • Many times, the President and members of • Congress must make decisions that benefit • the people who elect them, not necessarily • decisions that are good for the overall economy. • Therefore, they have an incentive to practice expansionary fiscal policies. • Coordinating Fiscal Policy • For fiscal policies to be effective, various branches • and levels of government must plan and work together. • State and local governments may be pursuing different goals for fiscal policy than the federal government.

10. The End