STARTER How can government use taxation and spending to smooth out the business cycle?

CHAPTER 15.1, 15.2, 15.3 USING FISCAL POLICY

WHAT IS FISCAL POLICY? Fiscal--refers to government revenue, spending, and debt Fiscal policy-government's use of taxes, spending to affect economy Expansionary fiscal policy--raises aggregate demand, stimulates economy Contractionary fiscal policy--reduces aggregate demand, slows economy Federal government's tools to influence economy: taxation, spending

PURPOSE OF FISCAL POLICY Expansionary fiscal policy designed to help a weak economy grow Contractionary fiscal policy used to slow down a growing economy - purpose is to control inflation

LIMITATIONS Fiscal policy has significant Policy lags Timing issues Rational Expectations Theory Political Issues Regional Issues

FEDERAL DEFICIT AND DEBT All levels of government struggle to achieve balanced budget Budget surplus occurs when government takes in more than it spends Budget deficit occurs when government spends more than it takes in Deficit spending--spending more than revenues for specific budget year National debt--the total amount of money the government owes

CAUSES OF THE DEFICIT Four main reasons for deficit spending National emergencies usually require massive spending beyond normal budget Building public goods and services is expensive, work takes years Public projects to stimulate, stabilize weak economy need large sums Entitlement programs that people depend on are expensive

EFFECT OF THE DEBT ON THE ECONOMY If government spending stimulates economy, jobs and public goods created If government outbids private sector, pays higher bond interest rates - crowding-out effect--money leaves private sector, interest rates rise Constant borrowing increases total interest and taxes to service debt - higher taxes decrease consumer spending and business investment