Ch 15: Fiscal Policy

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Ch 15 Fiscal Policy

• Section 1 Understanding Fiscal Policy

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Fiscal Policy

• To achieve ec growth, full employment, and price
  stability
• Budget submitted for every fiscal year (October-
  September)

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Four Steps in Creating the Federal Budget

• 1.Spending proposals sent to OMB
• Agencies must defend requests
• 2. Executive Branch
• OMB and President create one budget to present to
  Congress
• 3. Congress
• CBO and committees work on perfecting bill
• stop-gap spending
• 4. Approval
• President can sign or Veto, sometimes make a
  compromise bill

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Expansionary Fiscal Policies

• Raise level of output in economy (encourage
  growth)
• Increasing spending-raises prices
• Higher pricesmore goods produced more jobs
• Cutting taxes-have more to spend
• Increases demand and output

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Contractionary Fiscal Policies

• To reduce growth or output (to limit inflation)
• Decreasing spending- lower demand and lower
  prices
• Increasing taxes- less to spend
• Prices and production fall

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Limits of Fiscal Policy

• Not easy to change spending levels of government
• Cannot predict what the economy will do in the
  future
• Takes time for changes to take effect
• Politics often influences fiscal decisions
• Hard to get everyone to agree
• State level, National, Federal Reserve

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• Fiscal Policy Options

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Classical Economics

• Free markets are self-regulating
• Smith, Ricardo, Malthus
• Question is how long does it take to
  self-regulate?

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Keynesian/Demand Side Economics

• Examines why economy might not perform at
  productive capacity
• Government should use expansionary and
  contractionary fiscal policies
• To make up for any problems in individual and
  business sectors
• Recessions/depressions/inflation
• Multiplier Effect
• Automatic stabilizers- transfer payments and taxes

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Supply Side Economics

• Taxes have negative influence on economy
• Laffer Curve
• High tax rates dont necessarily mean more revenue

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History and Fiscal Policy

• World War II and Kennedy- Keynesian Economics
• 1980s- Supply-Side

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• Budget Deficits and the National Debt

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Balancing the Budget

• Goal to balance revenues and expenditures
• Usually a surplus or deficit
• Solving the deficit problem
• Create Money- can lead to hyperinflation
• Borrow Money-sell bonds, notes, and bills

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Deficit vs Debt

• Amount spent in excess of revenue each year
• Need to borrow to cover shortage

• Total amount of borrowed to cover deficit
  spending
• Some owed to government, some to others

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The National Debt

• http//www.brillig.com/debt_clock/
• http//www.uwsa.com/uwsa-usdebt.html
• http//www.toptips.com/debtclock.html

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Problems of a National Debt

• Crowding Out Effect
• Money spent on bonds instead of businesses
• Servicing the Debt
• Govt has to pay high interest rates
• Some say temporary deficit causes more
  productive economy

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Controlling the Deficit

• Gramm-Rudman-Hollings Act 1985 (GRH)
• Automatic cuts if deficit went over a certain
  amount
• Budget Enforcement Act of 1990
• Pay as you go on discretionary spending
• Budget Surplus in 90s- more taxes and less
  spending
• Currently returning to deficit spending b/c of
  tax cuts and increased spending

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Ways the Debt Affects the Economy

• Can reduce purchasing power
• Affects distribution of income
• Transfers purch power from private to public
  sectors
• Reduces incentive to work/save/invest
• Causes rise in interest rates

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• http//www.budgetsim.org/nbs/