1. Economics
Fiscal
Policy

2. Fiscal Policy
Fiscal Policy is the use of government spending and revenue collection to influence the economy
For example the government spends about $2 - 3 trillion each year
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3. Fiscal Policy
Fiscal policies are used to achieve economic growth, full employment, and stabilize inflation

4. Fiscal Policy The Federal Budget :
is a yearly plan for the federal government’s revenues and spending for the upcoming year

5. Federal Budget Timeline: All federal agencies request money (Feb)
The President requests money for his budgetary needs
The Office of Management and Budget works to create a budget (OMB)

6. Federal Budget Congress makes any changes (Aug – Oct)
Appropriation bills are debated
Defense, education, science, infrastructure…
The President can sign the budget or veto it

7. Fiscal Policy and the Economy
Fiscal Policy is used to increase or decrease the output of the economy
Expansionary policies are used to increase output if the economy is in a recession
Contractionary policies are used to decrease output during times of rapid growth or high inflation

8. Expansionary Fiscal Policies
Can be used to encourage growth when the economy is in a recession or to try and prevent a recession
Government spends money to increase the economy
The government buys goods or services
TARP: Troubled Asset Relief Program

9. Expansionary Fiscal Policies
Government spends money and…
Companies that sell goods to the gov’t earn profits and may hire more workers
Workers have more money to spend
Shops and restaurants buy more goods
Spending leads to more jobs and more output

10. Expansionary Fiscal Policies
Gov’t implements expansionary policies: Reducing Taxes
Individuals have more money in their paychecks
Businesses keep more of their profits
Consumers and firms have more money to spend on land, labor and capital

11. Contractionary Fiscal Policies
Can be used to decrease demand and this reduces the growth of economic output
When demand exceeds supply, producers must choose between raising output and raising prices. If they cannot expand production they will raise prices and that leads to inflation

12. Contractionary Fiscal Policies
Government implements contractionary policies:
Decrease Government spending
Increase tax rates on individuals and businesses

13. Limits of Fiscal Policies
Hard to predict business cycles
How quickly will they change
Hard to predict future of the economy
Economic Indicators
Hard to predict future behavior of individual consumers

14. Limits of Fiscal Policies
Hard to predict behavior of consumers
Fads, trends, future expectations, etc…

15. Limits of Fiscal Policies
Delayed results:
Implementing changes takes time
May take one to two years to fully implement changes
Consumers and firms may not be able to change quickly

16. Limits of Fiscal Policies
Before the changes in policy take effect, the economy may already be moving in the opposite direction
Ex. Government plans massive spending on highways during a recession, only to have the economy recover before construction begins.

17. Limits of Fiscal Policies
Government officials might wish to be re-elected
Voters like expansionary policies
Public may not be educated about Fiscal Policy:
Ex. Voters may like to see less government spending (contractionary) and lower taxes (expansionary) implemented at the same time!