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Economics Chapter 15

Economics Chapter 15. Fiscal Spending. Fiscal Policy. Use of government spending and revenue collection to influence the economy Federal Budget – new budget for each fiscal year = begins Oct 1 – Sept 30 OMB – office of Management and Budget – Part of executive branch

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Economics Chapter 15

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  1. Economics Chapter 15 Fiscal Spending

  2. Fiscal Policy • Use of government spending and revenue collection to influence the economy • Federal Budget – new budget for each fiscal year = begins Oct 1 – Sept 30 • OMB – office of Management and Budget – Part of executive branch • CBO – Congressional Budget Office

  3. Expansionary Fiscal Policies • Increase Government Spending – raises output and creates jobs • Cutting taxes – Individuals have more money to spend – increases output and creates jobs

  4. Contractionary Fiscal Policies • Decrease Government Spending – causes lower prices, encourage producers to cut production, and possibly lay off workers • Increase Taxes – Citizens will pay more in taxes, spend less on goods, encouraging producers to cut production, and lay off workers

  5. Limits of Fiscal Policy • Difficulty of Changing Spending Levels – entitlements must be funded • Predicting the Future – Can’t predict business cycle speed – can act to quickly or be too late • Delayed Results – By the time legislation goes into effect the economy may have changed • Political Pressure -

  6. Classical Economics • Believed that free markets regulated themselves • Adam Smith, Thomas Malthus • 1929 – Great Depression- challenged classical – how long would it take to regulate

  7. Keynesian Economics • John Maynard Keynes – did not want to wait • Demand Side Economics – encourages government action to increase or decrease demand/output • Believed consumer/producer had no incentive to spend enough to change the economy • Consumers had no job, no money to spend; why would producer produce more?

  8. Demand Side Economics • Idea that government spending and tax cuts help economy by raising demand • FDR elected 1932 – Government spending – created jobs, infrastructure building

  9. Supply Side Economics • Tax cuts help economy by increasing supply • Laffer Curve – shows relationship between tax rate set by the government and the total tax revenue that the government collects • High tax rates may not bring in much increase if the high tax rates cause economic activity to decrease

  10. Fiscal Policy in American History • WWII – Actually took the US out of depression • Government War Time Production – jobs, money invested into business • JFK Administration – cut taxes and later Vietnam War • 70’s unemployment/inflation soaring • 1981 Reagan elected – cut taxes, • Spending out of control – National Debt

  11. Balancing the Budget • Same amount going in as going out • Budget surplus – revenues exceed expenditure • Budget deficit – expenditures exceed revenues

  12. Responding to deficit • Creating $$ - Creates increase in amount of $ in circulation = Inflation • Could cause hyperinflation – very high inflation • Borrowing Money – sells bonds, • Allows government to create more public goods

  13. National Debt • Total amount of money the government owes • National Debt owned by investors in the US and around the world • Problems • Reduces amount of $ to be loaned to business • Increase interest rates • Government must pay interest to bond holders

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