[ 9.1 ] Understanding Fiscal Policy Learning Objectives Understand the differences between fiscal and monetary policy. Describe the steps of the federal government in formulating the budget. Identify the two types of fiscal policy. Explain how expansionary and contractionary policies affect macroeconomic output.

Fiscal Policy – The Great American Debate 2 types of American Macroeconomic Policies to influence the overall economy: Fiscal – the government influences and affects economic output through spending and tax collection Monetary – the Federal Reserve influences and affects economic output through control of the money supply With fiscal policy why would the gov’t want to expand or shrink overall economic growth? 2 possible reasons

To avoid or get out of RECESSIONS! 1 Reason To avoid or get out of RECESSIONS!

To stall or slow INFLATION! Another Reason To stall or slow INFLATION!

But how?

Affect the Federal Budget Much like a really, really, really big household budget but one that can affect the entire nation and world. ($3.5 trillion) Runs on a fiscal year (Oct. 1 – Sept. 30) Mostly works with changing discretionary spending 1. Begins with agency proposals → 2. Executive Branch’s OMB → President drafts a budget → 3. Congress modifies budget with CBO and passes initial resolution (May 15) → 2nd resolution (Sept 15) → Appropriations Cmmt. submits appropriations bills (Sept. 30) If not done, gov’t either uses “stopgag” funding or shuts down. → 4. President signs or vetoes budget.

Here’s where it gets political.

What do we do with the budget?

Use either an expansionary or contractionary fiscal policy!

Yay!!!!!!!!!!!!

Expansionary Policy Uses government policy and the budget to expand demand, prices, and overall economic output (the GDP). Cut Taxes – Take less money from businesses and individuals so they can either consume or invest in capital goods, jobs, and resources → GDP growth. Increase Gov’t Spending – Increase aggregate demand (What is this?) How can gov’t spending increase aggregate demand (AD)? What would be a side-effect of aggregate demand increases?

Fiscal Policy Expansionary Solutions

Federal Spending

Deficits and Surpluses

Contractionary Policy Uses government policy and the budget to contract or shrink demand, prices, and overall economic output (the GDP). Why!? Raise Taxes – Take money from businesses and individuals to decrease AD and lower prices. Decrease Gov’t Spending – Decrease AD because fewer jobs and loss of a major buyer in all markets. What political party would want to use a contractionary policy? Why would anyone want to use it?

Fiscal Policy Expansionary Solutions

Problems of Fiscal Policy Exit Ticket: Write down and think of at least two problems of either kind of fiscal policy. Entitlements and mandatory spending Predicting the business cycle Delayed Results: Too little (or too much) too late Political pressures: political parties and the voters Coordinating fiscal policies between the federal, state, and local

Exit Ticket: The Federal Budget The federal government will experience a “shut down” A. Immediately after Congress passes its first budget resolution after May 15. B. When the President vetoes the congressional budget. C. The executive Office of Management and Budget does not speak with the Congressional Budget Office. D. If the President and the Congress cannot agree on temporary funding if or when a budget is not passed by September 30th.

Quiz: Expansionary Policy An example of expansionary policy would be A. Raising the income tax rate B. Repairing interstate highway overpasses C. Reducing unemployment benefits D. Getting rid of the Environmental Protection Agency (EPA)

Quiz: Contractionary Policy A. Is meant to increase inflation B. Can theoretically be accomplished by raising taxes C. Is a policy that is actively wanted and used by both political parties D. Is best used during a contractionary period in the business cycle

Quiz: Limits of Fiscal Policy Which of the following is NOT a limit or cost of fiscal policy? A. States and local governments have a hard time coordinating their fiscal policies with the federal government. B. Fiscal policy can really only be implemented on discretionary spending—the minor portion of the federal budget. C. The results of fiscal policy occur too quickly in the economy, making them hard to control. D. It is too difficult to predict where the nation is currently at in the business cycle and where it will be going.