CHAPTER 29 Fiscal Policy Power Point Slides by

What you will learn in this chapter: What fiscal policy is and why it is an important tool in managing economic fluctuations Which policies constitute an expansionary fiscal policy and which constitute a contractionary fiscal policy Why fiscal policy has a multiplier effect and how this effect is influenced by automatic stabilizers How to measure the government budget balance and how it is affected by economic fluctuations Why a large public debt may be a cause for concern Why implicit liabilities of the government are also a cause for concern 2

Fiscal Policy: The Basics 3

Sources of Tax Revenue in the United States, 2004 4

Government Spending in the United States, 2004 5

The Government Budget and Total Spending Fiscal policy is the use of taxes, government transfers, or government purchases of goods and services to shift the aggregate demand curve. 6

Expansionary and Contractionary Fiscal Policy Expansionary Fiscal Policy Can Close a Recessionary Gap 7

Expansionary and Contractionary Fiscal Policy Can Eliminate an Inflationary Gap 8

The Multiplier Effect of an Increase in Government Purchases of Goods and Services 9

How Taxes Affect the Multiplier ØAutomatic Stabilizers ØDiscretionary Fiscal Policy 10

Differences in the Effect of Expansionary Fiscal Policies 11

The Budget Balance as a Measure of Fiscal Policy Øexpansionary fiscal policies Øcontractionary fiscal policies 12

The U. S. Federal Budget Deficit and the Business Cycle 13

The U. S. Federal Budget Deficit and the Unemployment Rate 14

The Actual Budget Deficit Versus the Cyclically Adjusted Budget Deficit 15

Government Debt as a Percentage of GDP 16

U. S. Federal Deficit and the Federal Debt-GDP Ratio since 1939 17

Japanese Deficits and Debt 18

The Implicit Liabilities of the U. S. Government 19

The End of Chapter 29 coming attraction: Chapter 30: Money, Banking, and the Federal Reserve System 20