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Fiscal Policy. What is fiscal policy? Use of government spending and revenue collection to influence the economy.

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Presentation on theme: "Fiscal Policy. What is fiscal policy? Use of government spending and revenue collection to influence the economy."— Presentation transcript:

1 Fiscal Policy

2 What is fiscal policy? Use of government spending and revenue collection to influence the economy.

3 Fiscal Policy Expansionary Used to raise the level of output in the economy. Increase government spending Buy more goods and services Create jobs Lowers unemployment Cut taxes More $ for individuals to spend Buy goods and services Creates jobs Contractionary Used to slow down growth to prevent demand from exceeding supply (if this happens, suppliers have to either raise prices or raise output – cant always increase output easily) Decrease government spending Govt buys less goods and services, triggers slower GDP growth Decreased demand, lower prices Lower production = lower GDP, slows growth Increase Taxes Less $ for individuals to spend Firms keep less of their profits, decrease spending on l, l, c. Decrease in demand Prices fall Cut production Slows GDP

4 Limits to Fiscal Policy Can be hard to put into place. Hard to change spending levels Some spending is fixed by law (entitlement programs – Medicaid, SS, veterans benefits. Small part of budget is discretionary spending (less room to cut) Hard to predict the future Economy sometimes hard to read Dont know how fast the business cycle will change Economists disagree over whats going on and what to do. Assumptions as to how people will behave are risky. Delayed Results Change takes time. Changes to budget take a year, then have to wait to feel effects of the change. Political Pressures Worries over re-election – make decisions to get elected, not always in interests of the economy. Coordinating Fiscal Policy Different levels of government need to work together, hard to do.

5 What is the budget and how is it created? Budget Written document that shows how much government expects to take in during a year and authorizing it to spend for the year. Its a plan to pay for the expenses of the government for a year. New budget prepared each year for a 12 month fiscal year (Oct. 1 – Sept. 30) Takes about 18 months to prepare

6 Steps to preparing the budget 1 – proposals are made and sent to the Office of Management and Budget (Congress and the President make the proposals.) 2 – OMB holds meetings to review proposals, works with Presidents staff to come up with a single budget. 3 – Congress considers, debates, makes changes, and works up a resolution. Appropriations Committee submits a bill to authorize spending. 4 – appropriations sent to President for signature. If he signs it, the budget is done.

7 Budget terms Balanced budget – revenue equals spending Budget surplus – take in more than spent Budget deficit – spend more than you take in.

8 Whats the difference between the national debt and the deficit? Debt – the total amount of money the federal government owes to bondholders. (government borrows each year to cover the deficit) We owe investors who hold government bonds. Its what we owe for all the years in existence added together! Deficit – the amount of money the government borrows for one budget, one year – the amount overspent in a year.

9 What is the national debt today? $12 trillion as of Nov. 18, Interest was $3 million/minute. March 16, 2005 it was $7.7 trillion (Fall semester) it was $8 trillion it was $8.4 trillion.


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