Economics Fiscal Policy Fiscal Policy Fiscal Policy is

  • Slides: 17
Download presentation
Economics Fiscal Policy

Economics Fiscal Policy

Fiscal Policy • Fiscal Policy is the use of government spending and revenue collection

Fiscal Policy • Fiscal Policy is the use of government spending and revenue collection to influence the economy – For example the government spends about $2 - 3 trillion each year $$$$$$$$$$$$$$$$$

Fiscal Policy • Fiscal policies are used to achieve economic growth, full employment, and

Fiscal Policy • Fiscal policies are used to achieve economic growth, full employment, and stabilize inflation

Fiscal Policy • The Federal Budget : – is a yearly plan for the

Fiscal Policy • The Federal Budget : – is a yearly plan for the federal government’s revenues and spending for the upcoming year

Federal Budget • Timeline: – All federal agencies request money (Feb) – The President

Federal Budget • Timeline: – All federal agencies request money (Feb) – The President requests money for his budgetary needs – The Office of Management and Budget works to create a budget (OMB)

Federal Budget – Congress makes any changes (Aug – Oct) • Appropriation bills are

Federal Budget – Congress makes any changes (Aug – Oct) • Appropriation bills are debated – Defense, education, science, infrastructure… – The President can sign the budget or veto it

Fiscal Policy and the Economy • Fiscal Policy is used to increase or decrease

Fiscal Policy and the Economy • Fiscal Policy is used to increase or decrease the output of the economy – Expansionary policies are used to increase output if the economy is in a recession – Contractionary policies are used to decrease output during times of rapid growth or high inflation

Expansionary Fiscal Policies • Can be used to encourage growth when the economy is

Expansionary Fiscal Policies • Can be used to encourage growth when the economy is in a recession or to try and prevent a recession – Government spends money to increase the economy • The government buys goods or services – TARP: Troubled Asset Relief Program

Expansionary Fiscal Policies • Government spends money and… – Companies that sell goods to

Expansionary Fiscal Policies • Government spends money and… – Companies that sell goods to the gov’t earn profits and may hire more workers – Workers have more money to spend – Shops and restaurants buy more goods – Spending leads to more jobs and more output

Expansionary Fiscal Policies • Gov’t implements expansionary policies: Reducing Taxes – Individuals have more

Expansionary Fiscal Policies • Gov’t implements expansionary policies: Reducing Taxes – Individuals have more money in their paychecks – Businesses keep more of their profits Consumers and firms have more money to spend on land, labor and capital

Contractionary Fiscal Policies • Can be used to decrease demand this reduces the growth

Contractionary Fiscal Policies • Can be used to decrease demand this reduces the growth of economic output – When demand exceeds supply, producers must choose between raising output and raising prices. If they cannot expand production they will raise prices and that leads to inflation

Contractionary Fiscal Policies • Government implements contractionary policies: – Decrease Government spending – Increase

Contractionary Fiscal Policies • Government implements contractionary policies: – Decrease Government spending – Increase tax rates on individuals and businesses

Limits of Fiscal Policies • Hard to predict business cycles – How quickly will

Limits of Fiscal Policies • Hard to predict business cycles – How quickly will they change • Hard to predict future of the economy – Economic Indicators • Hard to predict future behavior of individual consumers

Limits of Fiscal Policies • Hard to predict behavior of consumers – Fads, trends,

Limits of Fiscal Policies • Hard to predict behavior of consumers – Fads, trends, future expectations, etc…

Limits of Fiscal Policies • Delayed results: – Implementing changes takes time • May

Limits of Fiscal Policies • Delayed results: – Implementing changes takes time • May take one to two years to fully implement changes – Consumers and firms may not be able to change quickly

Limits of Fiscal Policies • Before the changes in policy take effect, the economy

Limits of Fiscal Policies • Before the changes in policy take effect, the economy may already be moving in the opposite direction – Ex. Government plans massive spending on highways during a recession, only to have the economy recover before construction begins.

Limits of Fiscal Policies • Government officials might wish to be re -elected –

Limits of Fiscal Policies • Government officials might wish to be re -elected – Voters like expansionary policies – Public may not be educated about Fiscal Policy: • Ex. Voters may like to see less government spending (contractionary) and lower taxes (expansionary) implemented at the same time!