1. Fiscal Policy

2. Bell Ringer Suppose you are a part of state school board that has already decided to help disadvantaged students obtain further education. Choose one of the following options for how the aid will be delivered.Suppose you are a part of state school board that has already decided to help disadvantaged students obtain further education. Choose one of the following options for how the aid will be delivered. A. $7000 voucher for tuitionA. $7000 voucher for tuition B. $7000 worth of government provided schoolB. $7000 worth of government provided school C. $7000 in cash to use for tuitionC. $7000 in cash to use for tuition D. $7000 refundable accountD. $7000 refundable account E. $7000 worth of education tax creditE. $7000 worth of education tax credit

3. Fiscal Policy Consists of increasing or decreasing government taxing and spending in order to control economic activity.Consists of increasing or decreasing government taxing and spending in order to control economic activity. OROR Fiscal policy manipulates aggregate supply and aggregate demand with government action.Fiscal policy manipulates aggregate supply and aggregate demand with government action.

4. Who? President and executive agencies through OMB ask for funding.President and executive agencies through OMB ask for funding. Congress and the CBO appropriate laws.Congress and the CBO appropriate laws. President signs legislation.President signs legislation. Agencies spend.Agencies spend.Agencies spend.Agencies spend.

5. Goal To smooth out the natural curves of the business cycle.To smooth out the natural curves of the business cycle. US pattern has been steady growth over the past century

6. Expansionary Policy Government SpendingGovernment Spending Provide public servicesProvide public services Programs for business growthPrograms for business growth Subsidize business costsSubsidize business costs Increased profitsIncreased profits TaxesTaxes Business savingsBusiness savings Public savingsPublic savings Wages upWages up More spendingMore spending Aggregate demand increases Driving up prices (inflation) Suppliers produce more Unemployment levels decline

7. Contractionary Policy Government SpendingGovernment Spending Business cost go upBusiness cost go up Infrastructure lagsInfrastructure lags Lay-offs and pay cutsLay-offs and pay cuts Low investmentLow investment TaxesTaxes Lower business profitsLower business profits Less disposable incomeLess disposable income Decreased leverageDecreased leverage Decline in innovationDecline in innovation Aggregate demand decreases Prices fall Production declines (recession) Unemployment rises

8. Limits of Fiscal Policy Difficult to change spending habitsDifficult to change spending habits Predicting, debating, passing lawsPredicting, debating, passing laws Delay, funding, bad timingDelay, funding, bad timing Political pressure, special interestsPolitical pressure, special interests Coordination (levels, regions, FED)Coordination (levels, regions, FED) Short vs. long term resultsShort vs. long term results

9. Politics of Fiscal Policy Government Big pictureBig picture OrganizationOrganization VisionVision No profit motiveNo profit motive Private Sector Self-interestSelf-interest IncentivesIncentives CompetitionCompetition Regulation?Regulation?

10. National Debt Debt - Cumulative total of deficit spending year after yearDebt - Cumulative total of deficit spending year after yearDebt Owed to those who hold federal government securitiesOwed to those who hold federal government securities Economists concern is lack of investment capitalEconomists concern is lack of investment capital Economists keep track of it as a % of GDPEconomists keep track of it as a % of GDP Deficit – spending that exceeds revenues from year to yearDeficit – spending that exceeds revenues from year to yearDeficit

11. Reflection Review the answer you wrote about the state school board decision, and the notes about how fiscal policy is a balance of government taxing and spending. Do you still agree with your previous position or do you think another solution might be favorable? ExplainReview the answer you wrote about the state school board decision, and the notes about how fiscal policy is a balance of government taxing and spending. Do you still agree with your previous position or do you think another solution might be favorable? Explain A. $7000 voucher for tuitionA. $7000 voucher for tuition B. $7000 worth of government provided schoolB. $7000 worth of government provided school C. $7000 in cash to use for tuitionC. $7000 in cash to use for tuition D. $7000 refundable accountD. $7000 refundable account E. $7000 worth of education tax creditE. $7000 worth of education tax credit

12. Classical Economics Laissez Faire – hands offLaissez Faire – hands off Keep government from the economy Free markets self correctFree markets self correct Natural market forces of AS and ADNatural market forces of AS and AD Business cycle ebs and flows normallyBusiness cycle ebs and flows normally

13. PRACTICE Hoover did nothingHoover did nothing Depression was too severeDepression was too severe Economy did not correct with falling pricesEconomy did not correct with falling prices Equilibrium corrections took too longEquilibrium corrections took too long

14. Keynesian Economics THEORYTHEORY Increase aggregate demandIncrease aggregate demand Business won’t spend with prices fallingBusiness won’t spend with prices falling Consumer won’t spend because of fearConsumer won’t spend because of fear Government should spendGovernment should spend It could borrowIt could borrow It had an incentiveIt had an incentive Make the economy work and win reelectionMake the economy work and win reelection

15. AD = C+I+G+(X-M) ConsumptionConsumption InvestmentInvestment GovernmentGovernment Net ExportsNet Exports Total ExportsTotal Exports Total ImportsTotal Imports

16. Practice The Great DepressionThe Great Depression FDRFDR The New DealThe New Deal WWII FundingWWII Funding New borrowingNew borrowing Heavy DebtsHeavy Debts Automatic StabilizersAutomatic Stabilizers

17. Supply Side Economics Taxes hurt economic growthTaxes hurt economic growth Targeted tax cuts will stimulate growth in specific areasTargeted tax cuts will stimulate growth in specific areas Tax cuts encourage entrepreneurshipTax cuts encourage entrepreneurship Taxes discourage unwanted behaviorTaxes discourage unwanted behavior

18. Reaganomics PracticePractice Shrink governmentShrink government Grow businessGrow business $ trickles down$ trickles down Result (1980-92)Result (1980-92) Economy grewEconomy grew Income gap increasedIncome gap increased Debt increasedDebt increased

19. Laffer Curve Measures total taxes collected as a percentage of the tax rateMeasures total taxes collected as a percentage of the tax rate Lower rates – incentive to make more $Lower rates – incentive to make more $ Collect more tax revenuesCollect more tax revenues Higher rates – disincentive to make $Higher rates – disincentive to make $ Lose tax revenuesLose tax revenues Where is the Laffer Curve? Where is the Laffer Curve?

20. Effect of Tax Cuts on Revenue Total Tax Revenue Tax Rate 0% 100%

21. Effect of Tax Cuts on Revenue Total Tax Revenue Tax Rate 0% 100% Current Tax Rate Tax Cut

22. Effect of Tax Cuts on Revenue Total Tax Revenue Tax Rate 0% 100% Current Tax Rate Tax Cut Increased Revenue

23. The Effect of Tax Cuts on Revenue Total Tax Revenue Tax Rate 0% 100% Current Tax Rate Tax Cut Decreased Revenue

24. The Effect of Tax Cuts on Revenue Total Tax Revenue Tax Rate 0% 100% Current Tax Rate Tax Cut

25. Politics Both Parties believe in KeynesianBoth Parties believe in Keynesian Argue over what to spend the money onArgue over what to spend the money on Both Parties believe in Supply SideBoth Parties believe in Supply Side Argue over who gets the tax breaksArgue over who gets the tax breaks Do these policies really matter?Do these policies really matter? SomewhatSomewhat Is there a another way?Is there a another way? Monetary PolicyMonetary Policy