1. Fiscal Policy
Chapter 15

2. What is Fiscal Policy?
The means by which a government adjusts its spending levels & tax rates to monitor & influence a nation’s economy
Used to achieve economic growth, full employment and price stability
A fiscal year is a 12- month period
The government’s fiscal year is October 1 to September 30

3. How Fiscal Policy Works- Keynesian Economics
Governments can influence productivity levels by increasing or decreasing tax levels & public spending
This influence can:
Curb inflation (which normally should be 2-3%)
Increase employment
Maintain a healthy value of money

4. Slowing the Economy- Contractionary Policies
Goal is to reduce growth
Necessary when inflation is too high
Government can:
Increase taxes to take money out of the economy
Decrease spending, thereby decreasing the money in circulation
Negative effects could be a sluggish economy & high unemployment

5. Expansionary Policies
Goal is to encourage economic growth
Higher government spending
Tax cuts to encourage consumer spending

6. An Example
Let's say that an economy has slowed down. Unemployment levels are up, consumer spending is down and businesses are not making profits.
The government decides to fuel the economy by decreasing taxes, which gives consumers more spending money.
At the same time, they increase government spending, such as building roads or schools.
By paying for such services, the government creates jobs and wages that are in turn pumped into the economy.

7. What will happen next? Overall unemployment levels will fall.
With more money in the economy and fewer taxes to pay, consumer demand for goods and services increases.

8. Who Does Fiscal Policy Affect?
Effects are not the same for everyone.
Depending on the policymakers goals or party affiliation, tax cuts or increases may only affect certain groups, like the middle class
When spending is adjusted, sometimes only small groups are affected
Spending to build a bridge provides jobs to construction workers
Expanding the space program would impact the Houston area

9. The Bottom Line
The biggest obstacle is deciding how much government involvement there should be
It is essentially accepted that some degree of government involvement is necessary to sustain a healthy economy

10. Budgets & the National Debt

11. The Federal Budget
The basic tool of fiscal policy is the federal budget
Two parts: revenue (taxes) & expenditures (spending)
When revenues exceed expenditures, there is a surplus
When expenditures exceed revenues, there is a deficit

13. Covering a Deficit The government can create money or borrow
Creating money can cause hyperinflation- very high inflation
The government can borrow money though treasury bills, treasury bonds or notes
Excessive borrowing has created a national debt of over $17 trillion