Fiscal Policy
Chapter 15
What is Fiscal Policy?
• The use of government spending and
revenue collection to influence the
economy
– This can either expand or reduce economic
growth
– Achieve full employment
– Maintain price stability
Federal Budget
• A written
document
estimating the
federal
government’s
revenue and
authorizing its
spending for
the coming
year
Fiscal Year

Any 12 month period used for budgetary
purposes


The USA calendar for its budget goes from
October 1 to September 30
How does it work??????????
Appropriations Bill
• A bill
authorizes a
specific
amount of
spending by
the
government
Classical Economics

A school of thought
based on the idea
that free markets
regulate themselves


Adam Smith
John Maynard Keynes
John Maynard Keynes
►A
British economist in the
1930s developed new ideas
to Economics.
► He believed boosting or
increasing demand when
the economy is down is the
government’s role.
► This is known as:
demand-side economics
Demand-Side Economics
►A
school of
thought based on
the idea that
demand for goods
drives the
economy
Keynesian Economics

A school of
thought that
uses demandside theory as
the basis for
encouraging
government
action to help
the economy
Supply-Side Economics
►A
school of
thought based
on the idea that
the supply of
goods drives the
economy
 Known as
“Reaganomics”
The 1980s
► The
United States was in a recession with
high unemployment and inflation
► President Ronald Reagan won the Election
of 1980
► In 1981 rejected Keynesian Economics and
believed in the ‘opposite’ believing the
supply-side economics could drive an
economy out of a recession
President Reagan in 1981
► President
Reagan
talked to the
American people
about how he
believed the best
way to get
Americas economy
going was through
Supply-Side
Economics
Supply-Side Economics works
if…………..
You lower taxes for the
wealthy and to
businesses
► They then put their tax
money back into their
business and its workers.
► They called this
“Trickling down”
► Business grow; workers
have more money to
spend; they spend on
other goods; those
business invest; those
workers spend their
money; and so on….
►
“Reaganomics”
►It
does not
work if
business
owners hold on
to their profits
not putting it
back into their
company.
Budget Surplus

A situation in
which budget
revenues
exceed
expenditures
Budget Deficit

A situation in
which
budget
expenditures
exceed
revenues
Treasury Bill

A government bond with a maturity date of
26 weeks or less

This means you lend the federal government
money to invest and you get paid with the
principle (your original investment) plus interest
Treasury Note

A government
bond with a term
of from 2 to 10
years
Treasury Bond

A government bond that is issued
with a term of 30 years
National Debt

The total
amount of
money the
federal
government
owes to
bondholders
Crowding-out Effect

The loss of
funds for
private
investment
caused by
government
borrowing
The End