FISCAL POLICY Chapter 15 What is Fiscal Policy

FISCAL POLICY Chapter 15

What is Fiscal Policy? • The means by which a government adjusts its spending levels & tax rates to monitor & influence a nation’s economy • Used to achieve economic growth, full employment and price stability • A fiscal year is a 12 - month period • The government’s fiscal year is October 1 to September 30

How Fiscal Policy Works- Keynesian Economics • Governments can influence productivity levels by increasing or decreasing tax levels & public spending • This influence can: • Curb inflation (which normally should be 2 -3%) • Increase employment • Maintain a healthy value of money

Slowing the Economy. Contractionary Policies • Goal is to reduce growth • Necessary when inflation is too high • Government can: • Increase taxes to take money out of the economy • Decrease spending, thereby decreasing the money in circulation • Negative effects could be a sluggish economy & high unemployment

Expansionary Policies • Goal is to encourage economic growth • Higher government spending • Tax cuts to encourage consumer spending

An Example • Let's say that an economy has slowed down. Unemployment levels are up, consumer spending is down and businesses are not making profits. • The government decides to fuel the economy by decreasing taxes, which gives consumers more spending money. • At the same time, they increase government spending, such as building roads or schools. • By paying for such services, the government creates jobs and wages that are in turn pumped into the economy.

What will happen next? • Overall unemployment levels will fall. • With more money in the economy and fewer taxes to pay, consumer demand for goods and services increases.

Who Does Fiscal Policy Affect? • Effects are not the same for everyone. • Depending on the policymakers goals or party affiliation, tax cuts or increases may only affect certain groups, like the middle class • When spending is adjusted, sometimes only small groups are affected • Spending to build a bridge provides jobs to construction workers • Expanding the space program would impact the Houston area

The Bottom Line • The biggest obstacle is deciding how much government involvement there should be • It is essentially accepted that some degree of government involvement is necessary to sustain a healthy economy

BUDGETS & THE NATIONAL DEBT

The Federal Budget • The basic tool of fiscal policy is the federal budget • Two parts: revenue (taxes) & expenditures (spending) • When revenues exceed expenditures, there is a surplus • When expenditures exceed revenues, there is a deficit

Covering a Deficit • The government can create money or borrow • Creating money can cause hyperinflation- very high inflation • The government can borrow money though treasury bills, treasury bonds or notes • Excessive borrowing has created a national debt of over $17 trillion