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Fiscal Policy
How We Decide to SPEND
or COLLECT Money
To ensure the health of our
economy, the government
wants:
–Full employment - Everyone
has a job
–Price Stability - Prices that do
not fluctuate up or down
drastically
–Economic Growth - Production
increases
Our economy works like a
cause and effect relationship:
Joe gets a good job and brings home a
paycheck.
He can then afford to buy new shoes for his
kids.
This requires the shoe company to produce
shoes.
To do so, they need to hire people.
This gives people money to buy products.
3 economic indicators:
• There are 3 factors that the Government looks at
to determine how our economy is doing:
• Gross Domestic Product (GDP): the value of all
goods and services produced in the country.
• Unemployment Rate: the percentage of people
who want a job, but cannot find one.
• Consumer Price Index: measures the change in
prices, if prices are too inflated, then people can't
afford the products.
Business Cycle
• The economy is constantly changing. It follows
an up and down pattern called the business
cycle.
• This cycle is like a roller coaster. The economy
will improve and go up for a while, reach a peak,
then go down for a while.
• Eventually, it will reach its low point and then go
up again. However, the goal is to try to keep the
economy stable.
Expansion
• During the expansion phase, the economy
grows.
– At this time, the unemployment rate is low, GDP is high
and the CPI is high.
•
During this period, the government wants the
economy to contract (less money) because of
inflation (prices too high)
Recession
• After the peak a recession follows, which is a
time of slowed spending and a shrinking
economy.
• During this period, the government wants to
expand the economy, or get people to buy
more.
Congress’ Job
• Only Congress can raise revenue
(TAXES) or decide how to spend money
(BUDGET) since that is the branch most
represented by the people.
– President still has to approve tax bills and
approve final budget (Checks and
Balances!!)
• Can use government spending and
taxation to influence the economy
– Can pump money into the economy to speed it up
or take money out to slow it down
Fiscal Policy
• During a RECESSION, to stimulate (up the
roller coaster)the economy the gov’t may:
– spend more money than it is making to
create jobs
– Reduce taxes so people have more
money to spend
• During too much EXPANSION, to slow
down the economy (down the roller
coaster) the gov.’t may:
– Spend less on social programs like
Welfare, Medicaid, etc
– Raise taxes so people have less to
spend
Deficit
• Over spending and reducing
taxes leads to a deficit (DEBT)
• Now the country has a growing
deficit (growing debt) so the
political demand is to cut the
deficit
• This could be harmful because
federal gov’t would have to cut
back spending on social
programs (housing, employment,
welfare, etc.)
Current Debt
• $13,050,826,460,886.97 as of June
1, 2010
• If you had started spending one
million dollars every single day when
Jesus was born, you still would not
have spent one trillion dollars by
now.
• Budgetary Enforcement Act: divided
budget into domestic policy, defense,
and international affairs
– Exceeding spending in any area would
take it out of next year’s budget