1 / 25

Chapter 15

Chapter 15. Using Fiscal Policy. Fiscal Policy. Fiscal Policy is the federal government’s use of taxes and government spending to affect the economy. There are three primary types: Expansionary Fiscal Policy is a plan to increase aggregate demand and stimulate the economy.

lok
Download Presentation

Chapter 15

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 15 Using Fiscal Policy

  2. Fiscal Policy • Fiscal Policy is the federal government’s use of taxes and government spending to affect the economy. • There are three primary types: • Expansionary Fiscal Policy is a plan to increase aggregate demand and stimulate the economy. • Contractionary Fiscal Policy is a plan to reduce aggregate demand and slow the economy. • Discretionary Fiscal Policy refers to actions selected by the government to stabilize the economy.

  3. Overall Goal = Stability • There are a few tools used frequently by the government to quickly stabilize the economy (automatic stabilizers). • 1. Public Transfer Payments (the more the pay, the less they have to spend) • 2. Progressive Income Taxes (Income tax)

  4. Expansionary Fiscal Policy • Used to increase Aggregate Demand. • Causes prices to rise. • Provides incentives to businesses in order to increase GDP. • There is a decrease in unemployment, increase in government spending, and/or a decrease in taxes.

  5. Contractionary Fiscal Policy • Used to reduce inflation or when the economy is growing too rapidly. • Decrease in government spending and an increase in taxes in order to control inflation. • Creates a trickle down effect where people have less money to spend so they do not over buy items.

  6. Limitations of Fiscal Policy • #1 Policy Lags: Congress can take longer than needed to act. • #2 Timing Issues: It has to match up with the business cycle. • #3 Rational Expectations Theory: This accounts for people acting ahead of time because they predict coming changes. • #4 Political Issues: Often times leaders act to get reelected not always to provide the best answer. • #5 Regional Issues: Not all parts of a country may face the same economic issues.

  7. Demand-Side and Supply-Side Policies

  8. Demand-Side Economics • Developed from the ideas of economist John Maynard Keynes who believed economic issues should be solved with government action. • The focus is to increase aggregate demand as a way of improving the economy.

  9. Keynesian Theory • Keynes believed that changes in demand influenced the business cycle. • He focused on investment as the key out of the GDP equation. • By increasing investment, Keynes believed that there would be a spending multiplier effect where a small change would have a great impact.

  10. Government and the Demand-Side • With Demand-Side Fiscal Policy, the government must make choices to increase demand and control inflation. • Keynes proposed a highly active government that used and expansionary policy to seek full employment. • The downside is although this works for recovery, it is hard to slow down after the recovery.

  11. Supply-Side Economics • The goal of supply-side policies is to provide incentives to producers to increase aggregate supply. • Supply-Side economics favors less government involvement in the areas of taxation, spending, and regulation.

  12. The Laffer Curve and its’ Effects • The Laffer Curve is a graph that illustrates the economist Arthur Laffer’s theory of how tax cuts affect tax revenues. • The idea is that when taxes go beyond a certain point, revenue decreases because people lose the incentive to work.

  13. Deficits and the National Debt

  14. Federal Deficit and Debt • A budget surplus is when the government takes in more revenue tan it spends and budget deficit is the opposite. • Deficit Spending is the government practice of spending more money than it takes in a given year. The growing annual deficits add up to the national debt. • http://www.usdebtclock.org/

  15. Causes of Deficit • #1 National Emergencies • #2 Need for Public Goods and Services (ex. Infrastructure) • #3 Stabilization of the Economy: Government Programs and Bail Outs • #4 Role of Government in Society (ex. Social Security)

  16. Money for Deficit Spending • When the government does not receive enough revenue it can borrow in 3 forms. • #1 Treasury bills mature in less than 1 year • #2 Treasury notes mature between 2 and 10 years • #3 Treasury bonds mature in 30 years

  17. Effect of the Debt on the Economy • One major effect is the crowding out effect where the government owns more in bonds than private owners do.

More Related