CHAPTER 29 Fiscal Policy PowerPoint® Slides by Can Erbil © 2005 Worth Publishers, all rights reserved

2 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

3 Fiscal Policy: The Basics

4 Sources of Tax Revenue in the United States, 2004

5 Government Spending in the United States, 2004

6 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.

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

8 Expansionary and Contractionary Fiscal Policy Contractionary Fiscal Policy Can Eliminate an Inflationary Gap

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

10 How Taxes Affect the Multiplier  Automatic Stabilizers  Discretionary Fiscal Policy

11 Differences in the Effect of Expansionary Fiscal Policies

12 The Budget Balance as a Measure of Fiscal Policy  expansionary fiscal policies  contractionary fiscal policies

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

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

15 The Actual Budget Deficit Versus the Cyclically Adjusted Budget Deficit

16 Government Debt as a Percentage of GDP

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

18 Japanese Deficits and Debt

19 The Implicit Liabilities of the U.S. Government

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