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Fiscal Policy

CHAPTER 15. Fiscal Policy. SECTION 1: Defining Fiscal Policy SECTION 2: Fiscal Policy Strategies SECTION 3: Fiscal Policy and the Federal Budget. SECTION 1. Defining Fiscal Policy. Objectives:. What role do taxes play in fiscal policy? What kinds of tax rates do governments set?

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Fiscal Policy

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  1. CHAPTER 15 Fiscal Policy SECTION 1: Defining Fiscal Policy SECTION 2: Fiscal Policy Strategies SECTION 3: Fiscal Policy and the Federal Budget

  2. SECTION 1 Defining Fiscal Policy Objectives: • What role do taxes play in fiscal policy? • What kinds of tax rates do governments set? • Which taxes are the most profitable?

  3. SECTION 1 Defining Fiscal Policy Role taxes play in fiscal policy: • fund government programs • influence individuals’ behavior

  4. SECTION 1 Defining Fiscal Policy Types of tax rates: • proportional • progressive • regressive

  5. SECTION 1 Defining Fiscal Policy Most profitable taxes: • individual income taxes • corporate income taxes • Social Security taxes • property taxes • sales taxes

  6. 2006 IRS Collections Data

  7. SECTION 2 Fiscal Policy Strategies Objectives: • How do supply-side and demand-side theories differ? • What are the chief tools of fiscal policy? • What factors limit the success of fiscal policy?

  8. SECTION 2 Fiscal Policy Strategies Differences between supply-side and demand-side theories • Supply-side economics: • focuses on achieving economic growth and stability by increasing product supplies • calls for limited government economic involvement • Demand-side economics: • focuses on achieving economic growth and stability by increasing aggregate demand • calls for active government economic involvement

  9. SECTION 2 Fiscal Policy Strategies Tools of fiscal policy: • marginal tax rates • tax incentives • government spending • public transfer payments • progressive income taxes

  10. SECTION 2 Fiscal Policy Strategies Limitations of fiscal policy: • timing problems • political pressures • unpredictable economic behaviors • lack of coordination among government policies

  11. SECTION 3 Fiscal Policy and the Federal Budget Objectives: • How is the federal budget developed? • What role does deficit spending play in the U.S. economy? • What methods can the government use to balance the federal budget?

  12. 2006 Federal Budget

  13. SECTION 3 Fiscal Policy and the Federal Budget Steps in the development of the federal budget: 1. prepared by the president, who consults with the OMB, the Council of Economic Advisers, the Department of Treasury, and other presidential advisers 2. analyzed, amended, and approved by Congress 3. signed or vetoed by president

  14. SECTION 3 Fiscal Policy and the Federal Budget Role of deficit spending in the U.S. economy: • provides economic support during national emergencies • provides social programs • stimulates the economy during recessions • promotes citizens’ economic well-being

  15. SECTION 3 Fiscal Policy and the Federal Budget Possible methods to balance the federal budget: • increase revenues • decrease expenditures

  16. CHAPTER 15 Wrap-Up 1. Explain why federal, state, and local governments collect taxes, and provide an example of each of the following: proportional tax, progressive tax, regressive tax. 2. How did John Maynard Keynes influence economic thought? 3. What tools do lawmakers use to enact fiscal policy? 4. Describe the process of developing and approving the federal budget, 5. What actions might the government take to balance the federal budget?

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