1. The Budget and Economic Polices
Chapter Seventeen

2. Basic Terms
GDP: Gross domestic product=the monetary value of all goods and services produced in a nation each year.
Inflation: When prices rise, the value of money declines, and people can buy less with what they have.
Recession: At least two quarters (6 months) where the GDP declines.
Depression: Severe and persistent drop in economic activity

3. Goals of Economic Policy
Economic growth: Annual increase in the GDP=more jobs, more goods and services produced, higher incomes, more profits for companies
Control inflation: where your purchasing power declines and the holdings of banks decrease.
Trying to slow inflation by increase interest rates may slow growth at the same time.
Goals of Economic Policy

4. Maintain positive balance of payments: the annual difference between payments and receipt between us and our trading partners or exporting more than we import
Goals p.2

5. Maintain budget discipline: small deficits are okay but large ones can hurt our ability to borrow and continue investing
Goals p.3

6. Goals p.4
Avoid negative externalities or the bad effects of economic growth
pollution
workplace injuries
health hazards
Unsafe products (such as tainted food, toys with lead, etc.)
Ex. Toyota

7. Tools of Macroeconomic Policy cont…
Macroeconomic policy looks at the performance of the economy as a whole or broad areas of the economy, such as employment.
Fiscal policy
Congress and the president try to alter government finances by raising or lowering government spending, raising or lowering taxes, and raising or lowering government borrowing
Difficult to use ex: the bailout, ARRA

8. Tools of Macroeconomic Policy
Government policy to influence interest rates and control the supply of money in circulation
Federal Reserve Board
Actions by the Fed affect how much money is available to businesses and individuals in banks, savings and loans, and credit unions.
It influences interest rates and the money supply.
Open market operations
Discount rate
Reserve requirements

9. Proper Role of Government in the Economy
Keynesians: If the economy is not being used to full capacity, it is the govt’s role to stimulate growth through increasing government spending, tax cuts, etc.
Monetarists: the gov. role should be limited to managing the money supply and credit

10. Proper Role of Government in the Economy cont…
Supply-side economic policy: The government should loosen the reins on the free market, cutting taxes, reducing regulations on businesses.
New Growth Theory: using government money to stimulate research, innovation, education, labs, science, etc.
Not always clear cut between Reps. and Dems

11. The Deficit and the National Debt
The budget deficit is the annual shortfall between what the government spends and what it takes in.
The national debt refers to the total of what the government owes.
Benefits and dangers of national debt
Rise of national debt typically associated with war

12. The Deficit and the National Debt cont…
The budget deficit is the annual shortfall between what the government spends and what it takes in.
The national debt refers to the total of what the government owes.
Benefits and dangers of national debt
Rise of national debt typically associated with war

13. State governments depend mostly on sales taxes
Taxation
Federal government
depends mostly on income taxes, which are only mildly progressive
other federal taxes, such as Social Security, are regressive
recent tax cuts for the rich will make the distribution of wealth more unequal
State governments depend mostly on sales taxes
Local governments depend mostly on property taxes