Chapter 15 Fiscal Policy
Section 1 Understanding Fiscal Policy
I. Fiscal Policy as a Tool
A. The use of government spending and revenue collection to influence the economy.
1. large flow of cash into and out of economy has large impact on aggregate demand and supply.
B. achieves economic growth, full employment, and price stability.
1. Fiscal policy decisions.
2. How much to spend and tax.
II. The Federal Budget
A. Amount of money the government expects to receive and can spend in a year.
1. fiscal year is a 12 month period
2. Oct 1-Sept. 30.
B. Spending Proposals
1. Federal agencies estimate what they intend to spend in the coming fiscal year.
2. Office of Management and budget receive these proposals.
C. In the Executive branch
1. Representatives from agencies must convince OMB that they need to money they are asking for.
2. OMB works with President to combine all the agency budgets into one budget.
D. In Congress
1. Congressional Budget Office assists members of congress on the President’s proposed budget presented in January or February.
2. Appropriations committees submit appropriations bills before the end of the previous fiscal year.
E. In the White House
1. President either vetoes or passes the bills.
2. Congress must come up with enough votes to override the president’s veto or work with the President to come up with a bill that will pass.
F. Fiscal Policy and the Economy
1. Expansionary policies increase output.
2. Contractionary policies decrease output
III. Expansionary Fiscal Policies
A. Increasing government Spending
1. raises output.
2. creates jobs
B. Cutting taxes.
1. Individuals have more money to spend.
2. Businesses keep more of their profits.
IV. Contractionary Fiscal Policies
A. Decreasing Government Spending
1. Slower GDP Growth.
2. Exact opposite if the government increases s spending.
B. Increasing taxes.
1. individuals have less money to spend.
V. Limits of Fiscal Policy
A. Difficulty of changing spending levels.
1. Many of the spending categories are entitlements.
B. Predicting the future
1. No one can predict how fast the business cycle will move from stage to the next.
C. Delayed results.
1. Officials have to wait for changes to affect the economy
D. Political pressures
1. The president and members of congress have to make decisions that benefit the people if they want to be reelected.
E. Coordinating Fiscal Policy
1. Various branches and levels of government must work together for policies to be effective.
Section 2 Fiscal Policy Options
I. Classical Economics
A. Free markets regulate themselves.
1. Adam Smith
2. David Ricardo
B. Great Depression of 1929 challenged this thinking.
II. Keynesian Economics
A. broader view
1. Productive capacity is maximum output an economy can sustain over a period of time without increasing inflation.
B. A new role for government
1. demand side economics
2. changing demand to help the economy.
C. Avoiding Recessions and Depressions
1. Federal government keeps track of total level of spending.
D. Controlling Inflation
1. contractionary fiscal policy.
2. increading taxes or reducing government spending
E. the Multiplier effect
1. every one dollar change in fiscal policy creates a greater than one dollar change in the national income.
F. Automatic Stabilizers
1. taxes
2. transfer payments
III. Supply-Side Economics
A. The Laffer Curve
1. relationship between tax rate set by government and total tax revenue collected.
B. Taxes and output.
1. tax cut increases total employment.
IV. Fiscal Policy in American History
A. World War II
1. Council of Economics Advisors
B. The Kennedy Administration
1. Tax cuts caused economy to grow rapidly over the next two years.
2. Consumption and GDP increased by more than 4%.
C. Supply Side polices in 1980s.
1. Reagan reduced taxes 25% over three years and the economy recovered and flourished.
Chapter 15 Fiscal Policy.doc