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Fiscal Policy

Fiscal Policy. Taxing & Spending. Essential Standards. The student will explain how the government uses fiscal policy to promote price stability, full employment and economic growth. The student will define fiscal policy.

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Fiscal Policy

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  1. Fiscal Policy Taxing & Spending

  2. Essential Standards • The student will explain how the government uses fiscal policy to promote price stability, full employment and economic growth. • The student will define fiscal policy. • The student will explain the government’s taxing and spending decisions. • The student will describe the difference between the national debt and government deficits. • The student will explain how changes in fiscal policy can impact an individual’s spending and savings choices.

  3. Fiscal Policy • Fiscal Policy is determined by two government actions: • Collecting taxes • Spending money • Both actions are controlled by the… • US Congress.

  4. Expansionary Fiscal Policy • Congress uses expansionary policy to raise the GDP… • Which can pull the economy out of a recession. • To do this, they have two methods: • Spend more money… • Or cut taxes… • If the economy is in HORRIBLE shape, Congress might do BOTH.

  5. Contractionary Fiscal Policy • Sometimes an economy grows TOO QUICKLY… • Which can cause runaway INFLATION. • So Congress might use contractionary policy to COOL THINGS OFF. • There are two methods: • Cut spending… • Raise taxes.

  6. Fiscal Policy: Classical Economics • Was the philosophy in the US from 1776 through 1932— • It is based on the ideas of Adam Smith… • When the economy is in trouble… • The government should DO NOTHING… • Keep its HANDS OFF, and the “invisible hand” would fix any problems. • But the Great Depression (1929-1947) raised this question: • HOW LONG DOES IT TAKE FOR THE INVISIBLE HAND TO GET BUSY?

  7. Demand Side (Keynesian) Economics • Was developed in the 1930’s by British economist John Maynard Keynes… • Who argued that the government was PART of the economy… • And in times of recession or depression… • The government should SPEND MORE MONEY… • Build bridges, highways, hospitals, schools, airports, dams, etc… • Which would CREATE JOBS… • And pull the economy OUT OF TROUBLE.

  8. Supply-Side Economics • Supply-siders believe that taxes HURT the economy. • And in times of recession or depression, TAX CUTS are essential. • Tax cuts increase demand… • Which increases business profits… • Which causes businesses to hire more workers… • And the government collects MORE MONEY… • Even though tax rates are LOWER.

  9. The Problem with Demand-Side Theory 1. Demand-side economics calls for increased government spending during hard-times… • But the spending the should be on ESSENTIAL PROJECTS that benefiteverybody—highways, bridges, roads and schools… • If spent on wasteful projects (“the bridge to nowhere”) then extra spending will do no good. 2. Keynesian theory also calls for MASSIVE GOVERNMENT SAVINGS during good times. • But the period between 2002 and 2008 was a time of TREMENDOUS ECONOMIC PROSPERITY in the US… • And the national debt grew by almost SIX TRILLION DOLLARS. • Demand side economics only works if the government is run by RESPONSIBLE ADULTS.

  10. The Problem with Supply-Side Theory • Although supply-side theory looks good on paper… • It has never actually worked in practice. • Under supply side policies of the Bush Administration (2000-2008)… • The national debt increased by SIX TRILLION DOLLARS… • 5.2 million new jobs were created, but 22.3 million were created under Bill Clinton (when taxes were higher). • So, although the theory looks good, IT DOESN’T WORK.

  11. Surpluses & Deficits • Budgetdeficit—the government spends more that it takes in. • Budget surplus—the government takes in more than it spends… • The US has been running a deficit for the last several years… • Leading to a huge national debt.

  12. The National Debt • Is the total amount of money the federal government owes to bondholders. • Every year that the government runs a deficit, it must borrow money to operate. • To borrow money, the government sells US Bonds (they are sometimes called SECURITIES). • Individuals and nations all over the world buy them… • Because they are viewed as some of the safest in the world… • The US is stable and has never defaulted on its debt.

  13. The National Debt, as of NOV 3, was…. Your personal share (if you are a US citizen) is… $44,344.15 Since September 28, 2007, the National Debt has increased by a DAILY average of… $4,160,000,000

  14. Why is the National Debt a Problem? • The government offers high interest rates to attract bond-purchasers… • But businesses that invest in the government are not investing in the private economy. • This is called the “crowding-out” effect. • Also, the interest on the national debt is nearly $300 billion a year… • Finally, a large debt leads to a loss in the value of the dollar.

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