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Fiscal Policy
What is fiscal policy?
 Use of government spending and
revenue collection to influence the
economy.
Fiscal Policy
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Expansionary
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Used to raise the level of output in
the economy.
Increase government spending
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Buy more goods and services
Create jobs
Lowers unemployment
Cut taxes
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Contractionary
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Used to slow down growth to
prevent demand from exceeding
supply (if this happens, suppliers
have to either raise prices or raise
output – can’t always increase
output easily)
Decrease government spending

More $ for individuals to spend
Buy goods and services
Creates jobs



Govt buys less goods and
services, triggers slower GDP
growth
Decreased demand, lower
prices
Lower production = lower GDP,
slows growth
Increase Taxes


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Less $ for individuals to spend
Firms keep less of their profits,
decrease spending on l, l, c.
Decrease in demand
Prices fall
Cut production
Slows GDP
Limits to Fiscal Policy
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Can be hard to put into place.
Hard to change spending levels
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Hard to predict the future
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Change takes time.
Changes to budget take a year, then have to wait to feel effects of the change.
Political Pressures
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Economy sometimes hard to read
Don’t know how fast the business cycle will change
Economists disagree over what’s going on and what to do.
Assumptions as to how people will behave are risky.
Delayed Results
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Some spending is fixed by law (entitlement programs – Medicaid, SS, veteran’s
benefits.
Small part of budget is discretionary spending (less room to cut)
Worries over re-election – make decisions to get elected, not always in interests of
the economy.
Coordinating Fiscal Policy

Different levels of government need to work together, hard to do.
What is the budget and how is
it created?
 Budget
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Written document that shows how much
government expects to take in during a
year and authorizing it to spend for the
year.
It’s a plan to pay for the expenses of the
government for a year.
New budget prepared each year for a 12
month fiscal year (Oct. 1 – Sept. 30)
Takes about 18 months to prepare
Steps to preparing the budget
 1 – proposals are made and sent to the Office
of Management and Budget (Congress and the
President make the proposals.)
 2 – OMB holds meetings to review proposals,
works with President’s staff to come up with a
single budget.
 3 – Congress considers, debates, makes
changes, and works up a resolution.
Appropriations Committee submits a bill to
authorize spending.
 4 – appropriations sent to President for
signature. If he signs it, the budget is done.
Budget terms
 Balanced budget – revenue equals
spending
 Budget surplus – take in more than
spent
 Budget deficit – spend more than you
take in.
What’s the difference between the
national debt and the deficit?
 Debt – the total amount of money the
federal government owes to
bondholders. (government borrows each
year to cover the deficit) We owe
investors who hold government bonds.
It’s what we owe for all the years in
existence added together!
 Deficit – the amount of money the
government borrows for one budget, one
year – the amount overspent in a year.
What is the national debt
today?
 $12 trillion as of Nov. 18, 2009.
 Interest was $3 million/minute.
 March 16, 2005 it was $7.7 trillion.
 2005 (Fall semester) it was $8 trillion.
 2006 it was $8.4 trillion.