Fiscal PolicyFiscal Policy

How We Decide to SPEND How We Decide to SPEND or COLLECT Moneyor COLLECT Money

To ensure the health of our To ensure the health of our economy, the government economy, the government

wants: wants:

–Full employment - Everyone has a job

–Price Stability - Prices that do not fluctuate up or down drastically

–Economic Growth - Production increases

Our economy works like a Our economy works like a cause and effect relationship:cause and effect relationship:

Joe gets a good job and brings home a paycheck.

He can then afford to buy new shoes for his kids.

This requires the shoe company to produce shoes. To do so, they need to hire people.

This gives people money to buy products.

3 economic indicators:3 economic indicators:• There are 3 factors that the Government looks

at to determine how our economy is doing:

• Gross Domestic Product (GDP): the value of all goods and services produced in the country.

• Unemployment Rate: the percentage of people who want a job, but cannot find one.

• Consumer Price Index: measures the change in prices, if prices are too inflated, then people can't afford the products.

Business CycleBusiness Cycle

• The economy is constantly changing. It follows an up and down pattern called the business cycle.

• This cycle is like a roller coaster. The economy will improve and go up for a while, reach a peak, then go down for a while.

• Eventually, it will reach its low point and then go up again. However, the goal is to try to keep the economy stable.

ExpansionExpansion

• During the expansion phase, the economy grows. – At this time, the unemployment rate is low, GDP is high

and the CPI is high.

• During this period, the government wants the economy to contract (less money) because of inflation (prices too high)

Recession Recession • After the peak a recession follows, which is a

time of slowed spending and a shrinking economy.

• During this period, the government wants to expand the economy, or get people to buy more.

Congress’ JobCongress’ Job• Only Congress can raise revenue

(TAXES) or decide how to spend money (BUDGET) since that is the branch most represented by the people.– President still has to approve tax bills and

approve final budget (Checks and Balances!!)

• Can use government spending and taxation to influence the economy– Can pump money into the economy to speed it up

or take money out to slow it down

Fiscal PolicyFiscal Policy• During a RECESSION, to stimulate (up the roller

coaster)the economy the gov’t may:– spend more money than it is making to create

jobs– Reduce taxes so people have more money to

spend• During too much EXPANSION, to slow down the

economy (down the roller coaster) the gov.’t may:– Spend less on social programs like Welfare,

Medicaid, etc– Raise taxes so people have less to spend

DeficitDeficit• Over spending and reducing

taxes leads to a deficit (DEBT)• Now the country has a growing

deficit (growing debt) so the political demand is to cut the deficit

• This could be harmful because federal gov’t would have to cut back spending on social programs (housing, employment, welfare, etc.)

Current DebtCurrent Debt• U.S. Debt Clock • If you had started spending one million

dollars every single day when Christ was born, you still would not have spent one trillion dollars by now.

• Budgetary Enforcement Act: divided budget into domestic policy, defense, and international affairs– Exceeding spending in any area would take

it out of next year’s budget