Download OUR MADCAP CONGRESS

True or False
• It is the responsibility of our Federal
government to ensure economic stability.
• TRUE!
Fiscal Policy Toolbox
• What tools does the
government
have to regulate the
economy?
• Tax policies
• Spending programs
• Who implements fiscal
policy?
• President/Congress
Taxes/
spending
Washington D.C.
Washington D.C.
Statuary Hall
Capitol Rotunda
White House
White House Backyard
I’m arriving for an economic summit
meeting with the Pres
Lincoln Memorial
Lincoln Memorial
definitely our tallest president
Jefferson Memorial
Jefferson Memorial
World War II Memorial
Vietnam War Memorial
The Wall
OUR MADCAP CONGRESS
MORE PORK (Pork Barrels) TO
PONDER
A FEW RECENT EXAMPLES
•
$224 million to build a bridge in Alaska
for about 8,200 people
•
$2.5 million to a rancher in New
Mexico NOT to develop a parcel of his
land
•
$200,000 to Ocean Spray to market
white cranberry juice in Great Britain
•
$12 million for a swine research center
(true pork spending)
•
$1 million for the National Flag
Foundation in Pittsburgh. Its purpose
is to inspire young people to have
more respect for the flag
A lot of little piggies went to market
• $1.2 million for Aluetian
Pribilof Church repairs
• $250,000 for onion
research in Georgia
• Market Access Program
(MAP) helps pay
advertising costs for
exporters of fruits and
veggies ($68m a year)
• $1.2 m to study the
breeding habits of the
woodchuck
• $84,000 on a study to find
out why people fall in love
Bringing home the bacon
(a Congressman’s district)
• $144,000 to see if pigeons
follow human economic laws
• $219,000 to teach college
students how to watch
television
• $160,000 to study if you can
hex an opponent by drawing
an X on his chest
• $100,000 to study how to
avoid falling spacecraft
• $500,000 to build a replica of
the Great Pyramid in Indiana
• Funds to study why people
are polite at bowling alleys
but rude on tennis courts
“the law of
demand says…”
3 Types of Federal Budgets
(a comparison of revenue and spending)
1. Balanced Budget
 Revenue and
Spending are equal
2. Surplus Budget
 Revenue is greater
than Spending
3. Deficit Budget
 Revenue is less
than Spending
• Budget Explorer: The Complete US
Federal Budget
• Budget of the United States Government:
Browse Fiscal Year 2008
• U.S. National Debt
Fiscal Policy and the
Federal Budget
II. Fiscal Policy to get us out of a recession
a. Decrease taxes
b. Increase government spending
c. Moves the budget towards a
deficit budget
III. Fiscal Policy and Inflation
a. Increase Taxes
b. Reduce Government Spending
c. This will move the federal budget towards
a surplus budget
Demand-Side Fiscal Policy
• Father of Fiscal Policy
• John Maynard Keynes
• Cut taxes &
increase Govt
spending during
a recession= Expansionary
Fiscal Policy
• Increase taxes
& decrease
spending to fight
Inflation= Contractionary
Fiscal Policy
Fiscal Policy and the
AD-AS Model
• Expansionary Fiscal Policy
–Increased Government
Spending
–Tax Reductions
–Some Combination of the Two
• Budget Deficit
STOP HERE
Fiscal Policy and the
AD-AS Model
Expansionary Fiscal Policy
Full $20 Billion
Increase in
Aggregate Demand
Price Level
$5 Billion
Additional
Spending
AS
Recessions
Decrease
Aggregate
Demand
P1
AD1
AD2
$490
$510
Real Domestic Output, GDP
Fiscal Policy and the
AD-AS Model
• Contractionary Fiscal Policy
–Decreased Government Spending
–Increased Taxes
–Some Combination of the Two
• Budget Surplus
• Policy Options: G or T?
G 11.1
Fiscal Policy and the
AD-AS Model
Contractionary Fiscal Policy
Recessions
Decrease
Aggregate
Demand
$5 Billion
Initial Decrease
In Spending
Price Level
AS
Full $20 Billion
Decrease in
Aggregate Demand
P1
AD4
AD3
$510
$522
Real Domestic Output, GDP
Federal Deficits and Surpluses – 1990 - 2005
as a Percentage of Potential GDP
Recent U.S. Fiscal Policy
(1)
Year
(2)
Actual
Deficit (-) or
Surplus (+)
(3)
Standardized
Deficit (-) or
Surplus (+)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
-3.9%
-4.4%
-4.5%
-3.8%
-2.9%
-2.2%
-1.4%
-0.3%
+0.8%
+1.4%
+2.5%
+1.3%
-1.5%
-3.4%
-3.5%
-2.6%
-2.2%
-2.5%
-2.9%
-2.9%
-2.1%
-2.0%
-1.2%
-1.0%
-0.4%
+0.1%
+1.1%
+1.1%
-1.1%
-2.7%
-2.4%
-1.8%
Source: Congressional Budget Office