Fiscal Policy Chapter 15

What is Fiscal Policy? The use of government spending and revenue collection to influence the economy –This can either expand or reduce economic growth –Achieve full employment –Maintain price stability

Federal Budget A written document estimating the federal government’s revenue and authorizing its spending for the coming year

Fiscal Year Any 12 month period used for budgetary purposes  The USA calendar for its budget goes from October 1 to September 30  How does it work??????????

Appropriations Bill A bill authorizes a specific amount of spending by the government

Classical Economics A school of thought based on the idea that free markets regulate themselves A school of thought based on the idea that free markets regulate themselves Adam Smith Adam Smith John Maynard Keynes John Maynard Keynes

John Maynard Keynes ► A British economist in the 1930s developed new ideas to Economics. ► He believed boosting or increasing demand when the economy is down is the government’s role. ► This is known as: demand-side economics demand-side economics

Demand-Side Economics ► A school of thought based on the idea that demand for goods drives the economy

Keynesian Economics A school of thought that uses demand- side theory as the basis for encouraging government action to help the economy A school of thought that uses demand- side theory as the basis for encouraging government action to help the economy

Supply-Side Economics ► A school of thought based on the idea that the supply of goods drives the economy  Known as “Reaganomics”

The 1980s ► The United States was in a recession with high unemployment and inflation ► President Ronald Reagan won the Election of 1980 ► In 1981 rejected Keynesian Economics and believed in the ‘opposite’ believing the supply-side economics could drive an economy out of a recession

President Reagan in 1981 ► President Reagan talked to the American people about how he believed the best way to get Americas economy going was through Supply-Side Economics

Supply-Side Economics works if………….. ► You lower taxes for the wealthy and to businesses ► They then put their tax money back into their business and its workers. ► They called this “Trickling down” ► Business grow; workers have more money to spend; they spend on other goods; those business invest; those workers spend their money; and so on….

“Reaganomics” ► It does not work if business owners hold on to their profits not putting it back into their company.

Budget Surplus A situation in which budget revenues exceed expenditures

Budget Deficit A situation in which budget expenditures exceed revenues

Treasury Bill A government bond with a maturity date of 26 weeks or less This means you lend the federal government money to invest and you get paid with the principle (your original investment) plus interest

Treasury Note A government bond with a term of from 2 to 10 years A government bond with a term of from 2 to 10 years

Treasury Bond A government bond that is issued with a term of 30 years A government bond that is issued with a term of 30 years

National Debt National Debt The total amount of money the federal government owes to bondholders The total amount of money the federal government owes to bondholders

Crowding-out Effect The loss of funds for private investment caused by government borrowing The loss of funds for private investment caused by government borrowing

The End