Download Fiscal Policy

Fiscal Policy
 If your family or you made a budget to
calculate family expenses than you are
practicing a key IDEA that is related to Fiscal
Policy = Balancing a Budget
 The Federal Budget is the amount of money
the government expects to receive from taxes
each year.
 Fiscal year = A 12 month time period the
government uses for the federal budget. It
runs from October 1 – September 30.
Tools of Fiscal Policy
 1. Expansionary Fiscal Policy

A. Used to encourage economic growth
and take the U.S. out of a recession.

B. 2 Ways to Promote Growth
1. Increasing Government Spending
2. Cutting Taxes

Expansionary
 1.
Government Spending = Creates
more jobs and increases Aggregate
Demand which causes prices to rise.
Ultimately, this leads to an increase
in output and lower unemployment
Expansionary Fiscal Policy
 2. Cutting Taxes = Consumers and
Businesses have more money to spend and
invest.
Contractionary Fiscal Policy
 Attempts by the government to decrease
aggregate demand and slow the growth of
the economy.
 This is done to avoid INFLATION because
demand is growing ahead of supply and
businesses to not want to Increase Prices to
keep up.
 2 ways:
 A. Decrease Government Spending
 B. Increasing Taxes
Which one is contractionary?
Fiscal Policy: Why do we use it?
Before the Great Depression, America followed
the classic economic model – Adam Smith
Idea that supply and demand will return to
equilibrium.
BUT, this model was upset by the Great
Depression.
 Developed by Economist, John Keynes –
Believed that all 3 connected to fight
recessions and inflation periods
Businesses
Government
Individuals
 Keynes believed the Government was the key
to helping America out of recessions by
SPENDING until the private sector starts to
feel confident and spends again.
 During the Great Depression this was done
by the New Deal
What really took us out of the
Depression?
WORLD WAR II
Fiscal Policy is Related to Budgets
 Does the United States have a debt?
U.S. Debt
Budget = Basic tool of Fiscal Policy
 Made up of 2 parts:
 1. Revenue (taxes)
 2. Expenditures (spending programs)
 When the Govt’s revenues equal its
expenditures the government has a balanced
budget!
 However, the fed. Budget is almost never
balanced.
 The federal budget is usually never balanced.
It is either experiencing a surplus or a
deficit.
 Budget surplus – When revenues exceed
expenditures. More money going into the
Treasury!
 Budget deficit – When the government
spends more than it is receiving. More money
going OUT of the Treasury than coming in.
Recent History of Both
 Deficits and Surpluses are linked to
government spending and taxes. Therefore,
they are constantly shaped by outside
pressures – recessions, wars, paying for
Social Security, etc.
Responding to Government Deficits
 1 Create more money and put more money
into circulation = increases demands for
goods and services.
 2. Borrow money = Selling Bonds
Deficit Vs. Debt
 Deficits occur when the government must
borrow money for one years budget if there is
not enough money.
 National debt = The sum of all the
government borrowing from the Revolutionary
War until today MINUS the borrowing that
have been repaid.
National Debt
 Our Debt is Large, HOWEVER, when you
measure it as a percentage of GDP we gain a
better picture of its significance.
 Usually, debt will rise during wartime and
decrease during peacetime, but in the 1980’s
this changed as government spending
increased and taxes lowered.
Debating the National Debt
Over 9 Trillion and
climbing