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Fiscal Policy

Fiscal Policy. Chapter 15. Understanding Fiscal Policy. Chapter 15, Section 1. Fiscal Policy. Fiscal policy is the use of government spending and revenue collection to influence the economy Federal Budget…plan for the reception and spending of government revenues

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Fiscal Policy

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  1. Fiscal Policy Chapter 15

  2. Understanding Fiscal Policy Chapter 15, Section 1

  3. Fiscal Policy • Fiscal policy is the use of government spending and revenue collection to influence the economy • Federal Budget…plan for the reception and spending of government revenues • Fiscal year…12 month period that begins on any date

  4. Actions of Fiscal Policy • Expansionary policy • Fiscal policy that encourages economic growth • Higher spending, tax cuts • Contractionary Policy • Fiscal policy that reduces economic growth • Lower spending, higher taxes

  5. Limits of Fiscal Policy • Hard for the government to change spending levels • Hard to predict the future • Sometimes, action is too late • Delayed time…changes don’t happen overnight

  6. Review 1. Fiscal policy is (a) the federal government’s use of taxing and spending to keep the economy stable. (b) the federal government’s use of taxing and spending to make the economy unstable. (c) a plan by the government to spend its revenues. (d) a check by Congress over the President. 2. Two types of expansionary policies are (a) raising taxes and increasing government spending. (b) raising taxes and decreasing government spending. (c) cutting taxes and decreasing government spending. (d) cutting taxes and increasing government spending.

  7. Fiscal Policy Options Chapter 15, Section 2

  8. Fiscal Policy Options • Classical Economics…the idea that the free market regulates itself • Great Depression pointed out the weakness of this thought • Keynesian Economics (John Maynard Keynes) • The idea that the government should increase spending to spark demand and help the economy • Know as demand side economics

  9. Demand Side Economics • Results in the multiplier effect • Idea that $1 spending by the government results in many more in the private sector • Automatic Stabilizers • If set up properly, fiscal policy can automatically stabilize the economy • Taxes • Low income…lower taxes and more transfer payments • High income…more taxes and fewer transfer payments

  10. Supply Side Economics • Belief that the economy should work to increase supply • Too much government control will reduce productivity • Taxes that are too high will discourage work • Shown by the Laffer Curve • Calls for less government spending and tax cuts

  11. Review 1. What are the two main economic problems that Keynesian economics seeks to address? (a) business and personal taxes (b) military and other defense spending (c) periods of recession or depression and inflation (d) foreign aid and domestic spending 2. Government taxes or spending categories that change in response to changes in GDP or income are called (a) fiscal policy. (b) automatic stabilizers. (c) income equalizers. (d) expansionary aids.

  12. Budget Deficits and the National Debt Chapter 15, Section 3

  13. Deficits and National Debts • The federal budget is rarely balanced • Either running a surplus or a deficit • Two ways to combat the deficit • Create money • May lead to hyperinflation • Borrow money • Sell bonds • Borrowing increases the debt

  14. Problems with the National Debt • Borrowing money creates a national debt • Debt is not the same as the deficit • Problems arise with the national debt • Creates investment competition for private business • This is known as the crowding out effect • Servicing the debt • Paying off interest on the debt is an opportunity cost • http://www.usdebtclock.org/

  15. Review 1. A balanced budget is (a) a budget in which expenditures equal revenues. (b) a budget in which expenditures do not equal revenues. (c) a budget in which the government spends money. (d) a budget in which revenues equal taxes. 2. Which of the following are problems associated with a national debt? (a) increased spending on defense and education (b) the crowding-out effect and interest payments on the debt (c) interest payments on the debt and too much individual investment (d) increased individual investment and decreased government spending

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