1. Fiscal Policy

2. How much money does the Federal Government spend . . .
. . . Every Year?
$2.3 Trillion Dollars
That’s $2,300,000,000,000
. . . Every Day?
$6 Billion or $6,000,000,000
. . . Every Hour?
$250 Million or $250,000,000
That’s about $4.2 Million every minute and $70,000 every second

3. Fiscal vs Monetary
Fiscal Policy is the way the government collects and spends revenue to influence the economy.
Changes in federal government spending or taxes designed to promote full employment, price stability and reasonable rates of economic growth.
Monetary Policy is the actions the Federal Reserve takes to influence inflation and the GDP.
Decisions that lead to changes in the supply of money and the availability of credit.

4. Federal Budget
The Office of Management and Budget (OMB) spends the year collecting data from all parts of the Federal Government on how much money they need next year.
Then they advise the President on what everyone reported
The President proposes a budget
Congress then looks at and changes it and eventually proposes a modified version
Congress then adds appropriation bills that add new spending to the budget for specific projects
The President then signs it into law or vetoes it.

5. Expansionary Policies
Fiscal policies that encourage economic growth
Government spending more
Tax Cuts
Designed to increase
aggregate demand
Intent to increase GDP
and reduce unemployment

6. Contractionary Policies
Fiscal policies that reduce economic growth
Government spending less
Tax increases
Designed to decrease
aggregated demand
Intent to control
inflation

7. Limits of Fiscal Policy
Can only change Discretionary Spending (about 38% of budget)
Hard to predict the future
Results not immediate
Political Pressure
Coordinating with States

8. Fiscal Policy Options
Classical Economics – Free markets regulate themselves
If we leave the economy alone, it will eventually work itself out.
This is how we did it, UNTIL the Great Depression

9. Fiscal Policy Options 2. Keynesian Economics
(a.k.a. : Demand-Side Economics or
Traditional Economics)
- Government action should be used to increase or decrease demand
- For example, if there is a depression, only the government has money. So the government should use that money to increase demand

10. Fiscal Policy Options 2. Keynesian Economics (continued)
- Increasing taxes and reducing spending lowers consumer demand
- Decreasing taxes and increasing spending increases consumer demand
Multiplier Effect – If the government spends $1 it has more than a $1 effect on the economy

11. Fiscal Policy Options 3. Supply-side Economics
- Government Action should be used to increase or decrease supply
- Increasing taxes lowers companies supply
- Decreasing taxes increases companies supply

12. U.S. Fiscal Policy History
World War II – Increased spending by Government on war goods, increased demand.
- Result: Great Depression ends, economy booms

13. U.S. Fiscal Policy History
B. Kennedy Administration – Economy going well. Chief Financial Policy Advisor: Walter Heller convinces Kennedy to cut taxes to decrease unemployment rate.
- Result: Economy grows rapidly

14. U.S. Fiscal Policy History
Supply Side Policies of the 1980’s
Ronald Reagan enacts Supply-side policies to end high inflation of the 1970’s
Does NOT want to spend (and increase demand) to fix economy
Used Federal Reserve
to tighten money supply
Result: Economy Recovers
However: During Reagan
years government spending
rises every year.