Fiscal Policy, Deficits, and Debt Chapter 30 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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Fiscal Policy, Deficits, and Debt Chapter 30 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

30-2 Chapter Objectives Purposes, tools, and limitations of fiscal policy Built-in stabilizers and the business cycle The standardized budget and U.S. fiscal policy U.S. public debt

30-3 Fiscal Policy Council of Economic Advisers (CEA) Discretionary fiscal policy –Eliminate recessionary or inflationary gap –Countercyclical Nondiscretionary fiscal policy –Passive or automatic

30-4 Expansionary fiscal policy –Increased spending and/or lower taxes –Budget deficit Contractionary fiscal policy –Lower spending and/or higher taxes –Budget surplus Policy options? Fiscal Policy

30-5 Expansionary Fiscal Policy Real Domestic Output, GDP Price Level AD 2 Recessions Decrease Aggregate Demand AD 1 $5 Billion Additional Spending Full $20 Billion Increase in Aggregate Demand AS $490$510 P1P1

30-6 Contractionary Fiscal Policy Real Domestic Output, GDP Price Level AD 3 Reduce Demand Pull Inflation AD 4 $5 Billion Initial Decrease In Spending Full $20 Billion Decrease in Aggregate Demand AS $510$522 P1P1

30-7 Built-In Stability Automatic stabilizers –Taxes and transfers Economic importance Tax progressivity –Progressive tax system –Proportional tax system –Regressive tax system

30-8 Standardized Budget Balance Percentage of Potential GDP, 2007 Source: Organization for Economic Cooperation and Development Denmark New Zealand Ireland Canada Norway France United States United Kingdom Japan Deficits Surpluses

30-9 Federal Budget Balance Actual and Projected, Fiscal Source: Congressional Budget Office $ Budget Deficit (-) or Surplus, Billions ActualProjected(as of March 2008)