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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
Plan indicates what the fed. gov’t has in expenses
 Takes 18 months to prepare
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Fiscal year…12 month period that begins on
any date (Gov’t uses Oct. 1 – Sept. 30)
Actions of Fiscal Policy
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Expansionary policy

Fiscal policy that encourages economic
growth (used to prevent recession)
Higher spending by the gov’t, tax cuts
 Gov’t buys more goods & services to create jobs
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Contractionary Policy

Fiscal policy that reduces economic growth
Lower gov’t spending, higher taxes (decrease
demand)
 Gov’t buys less goods to slow GDP growth
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Limits of Fiscal Policy
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Hard for the government to change
spending levels
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Hard to predict the future
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Spending comes from disposable income
Sometimes gov’t action is too late so they
may wait until they KNOW more information
Delayed time…changes don’t happen
overnight (budget planning takes 1.5 yrs)

Economy may be moving in different direction
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.
Fiscal Policy Options
Chapter 15, Section 2
Fiscal Policy Options

Classical Economics…the idea that the
free market regulates itself

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Great Depression proved this incorrect
Demand should have increased during GD bec
of falling prices but did not
Keynesian Economics

The idea that the gov’t should increase
spending to spark demand and help the
economy

Know as demand side economics
Demand Side Economics

Results in the multiplier effect

Idea that $1 spending by the government
results in many more in the private sector
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Fiscal policy carried out is multiplied
Automatic Stabilizers (taxes)

If set up properly, fiscal policy can
automatically stabilize the economy
Low income…lower taxes and more transfer
payments for people. Gov’t takes less, you spend $
 High income…more taxes and fewer transfer
payments. Gov’t take more, you save $

Supply Side Economics

Belief that the economy should work to
increase supply: aggregate supply goes up

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Too much government control will reduce
productivity (Ex. Taxes that are too high)
Taxes that are too high will discourage work
Calls for less government spending and tax
cuts

Tax cuts increase employment so much so that the
gov’t actually collects more $$ at a new, low rate
Review
1. What are the two main economic problems that
Keynesian economics seeks to address?
(a) business and personal taxes
(b) military and other defense spending
(c) periods of recession or depression and inflation
(d) foreign aid and domestic spending
2. Government taxes or spending categories that change
in response to changes in GDP or income are called
(a) fiscal policy.
(b) automatic stabilizers.
(c) income equalizers.
(d) expansionary aids.
Budget Deficits and the
National Debt
Chapter 15, Section 3
Deficits and National Debts

The federal budget is rarely balanced


Either running a surplus (more $ coming in)
or a deficit (more $ going out)
Two ways to combat the deficit

Create money (increase $$ in circulation)

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May lead to hyperinflation (prices/goods increase)
Borrow money
Sell bonds for project (highways, roads, etc.)
 Borrowing increases the debt
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Problems with the National Debt

Borrowing money creates a national debt
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Debt is not the same as deficit
Nat’l debt is all the $ the gov’t owes creditors
Problems arise with the national debt
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Crowding out effect
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Creates investment competition for private
business (gov’t crowds out private borrowing)
Servicing the debt

Paying off interest on the debt is an opportunity
cost bec the $ could be spent on something else
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