Chapter 15: Fiscal Policy

Transcription

1 SCHS SOCIAL STUDIES What you need to know UNIT 6 1. Explain how the government creates the federal budget 2. Understand the role fiscal policy has played in American history 3. Analyze how budget deficits add to the national debt 4. Summarize the problems caused by the national debt Terms you should know Fiscal Policy Federal Budget Fiscal Year Office of Management and Budget Congressional Budget Office Appropriations Bill Expansionary Policies Contractionary Policies Classical Economics Productive Capacity Demand-Side Economics Keynesian Economics Multiplier Effect Automatic Stabilizer Supply-side Economics Council of Economic Advisors Balanced Budget Budget Surplus Budget Deficit Hyperinflation Treasury Bill Treasury Note Treasury Bond National Debt Crowding-out Effect

2 15-1 Summary: Fill in the missing words. is the government s use of taxing and spending to keep the nation s economy stable. Decisions about fiscal policy are used to create the, a written document showing how much money the government expects to receive and spend in a year. The budget process begins when each federal agency estimates spending for the next year. They send these estimates to the executive branch s. The OMB reviews proposals and, with the President s staff, combines all budgets into one document, which the President presents to Congress. Congress reviews the budget with the help from the. Congress then proposes its modified budget and authorizes specific spending in, which the President can sign or veto. are designed to increase economic output. When the government increases its spending it buys more goods and services, leading to economic growth. When government cuts taxes, people have more money to spend, a situation which also leads to economic growth. Policies intended to decrease output are. These policies allow government to decrease its spending or raise taxes, both of which will lead to slower economic growth. Fiscal policy is not easy to put into practice. Changes in the economy come slowly. During the time it takes to pass a budget and implement fiscal policy, the business cycle may change on its own. The President and Congress work together to create the budget of the federal government. OUTLINE THE PROCESS OF CREATING THE FEDERAL BUDGET. Federal agencies send requests for money to the Office of Management and Budget Congress makes changes to the budget and sends this new budget to the President The President vetoes the budget. If Congress cannot get a 2/3 majority to override the President s veto, Congress and the President must work together to create a new, compromise budget.

3 Fill in two supporting facts or details under each main idea by answering each question Main Idea: The president and Congress work through a budget process to draw up a spending plan for the following fiscal year. 1. Which part of the executive branch is responsible for preparing the president s budget proposal? 2. Which congressional committees submit the final bills that authorize specific spending? Main Idea: The federal government may use fiscal policy to try to make the economy run more smoothly. 3. Under what conditions might the government use expansionary fiscal policies? 4. Under which conditions might the government use contractionary fiscal policies? Main Idea: The federal government has specific policies that it uses to influence the economy. 5. What are its two main expansionary policies? 6. What are its two main contractionary policies? Main Idea: Although fiscal policies may appear to be powerful economic tools, they can be difficult to put into practice. 7. What kinds of entitlement programs make it difficult to change spending levels? 8. Why does it take so long to put fiscal changes into effect?

4 15-2 Summary: Fill in the missing words. was a school of thought stating that markets regulate themselves and will return to equilibrium without government interference. The Great Depression challenged this view. Although prices fell, demand did not increase because so many people lacked jobs and money. John Maynard Keynes introduced a theory, called, which emphasized the role of government in the economy. Keynes said the Depression continued because neither consumers nor businesses had an incentive to increase spending. Companies would not increase production if consumers had no money to buy their products. Consumers who were unemployed had no money to spend. Keynes argued that the government could buy more goods and services, encouraging production, which in turn would put more people back to work. Fiscal policy is powerful because of the, the idea that every dollar change in fiscal policy creates a greater than one dollar change in the national economy. For example, if the government buys $10 billion in goods and services, GDP increases by more than $10 billion because firms spend money on wages, raw material, and investment. Workers, suppliers, and stockholders will have money to spend. states that taxes have a greater negative effect on economic output. Supply-siders argue that lower taxes put more money in people s pockets, which in turn leads to greater investment and more jobs. Under President Ronald Reagan in the 1980s, the government cut taxes and implemented supply-side policies. Different economic theories have different views about the government s use of fiscal policy. COMPARE THE DIFFERENT ECONOMIC THEORIES. Classical Economics Keynesian Economics Supply-Side Economics

5 Answer the following questions. 1. What failure of classical economics did the Great Depression highlight? 2. How did John Maynard Keynes explain the continuation of the Great Depression? 3. According to Keynes, how could the Depression-era government make up for the drop in private spending? a. What did Keynes say the result would be? 4. What economic data did Keynes say the federal government should track? a. For what purpose? 5. Why did Keynesian economics lose popularity in the 1960 s and 1970 s? 6. What is a stable economy? 7. When the national income is low, how do taxes and government transfer payments help stabilize the economy? 8. According to supply-side economics and the Laffer curve, how do higher tax rates affect the economy? 9. What argument lies at the heart of supply-side economics? 10. How did President Kennedy propose to increase demand?

6 15-3 Summary: Fill in the missing words. When government revenues equal spending, a exists. In reality, the federal budget is rarely balanced. A occurs when annual revenues are higher than spending. A occurs when spending is higher than revenues. When the government runs a deficit, it must find a way to pay for the extra expenditures. It can either create money or borrow money. Covering huge deficits with created money can lead to, or a very high inflation. The main way that government borrows money is by selling bonds, such as United States Savings Bonds. When government borrows money, it creates a, the total amount of money the government owes to bondholders. Two problems arise from a national debt. First, it reduces funds available for businesses to borrow and invest because people buy government bonds instead of investing in business. Second, government pays interest to bondholders, and money spent paying interest cannot be spent elsewhere. In the 1980s, huge deficits led Congress to pass laws cutting federal spending. After the Supreme Court found many of these laws unconstitutional, some people suggest amending the Constitution to require a balanced budget. Opponents said an amendment would prevent government from dealing with rapid economic changes. At the beginning of the twenty-first century, budget surpluses occurred for the first time in thirty years. However, many long-term projections predict that deficits will return.

7 Surplus or Deficit (Billions of dollars) When the federal spending is greater than revenue, budget deficits and a national debt are the result. FROM YOUR TEXTBOOK, CHART THE BUDGET SURPLUSES AND DEFICITS. Budget Surplus and Deficits Year 1. When did the federal government run the largest deficit? The largest surplus? 2. What was the dominate trend in deficits in the late 1990s?

8 Complete the following sentences. 1. When the government increases the amount of money in circulation to cover large deficits, inflation results because 2. Wise federal borrowing allows the government to 3. The national debt will grow each year that 4. The national debt is owned by 5. Historically, national debt as a percentage of GDP rises during 6. The two problems of a national debt are that 7. The opportunity cost of servicing the debt is that 8. Today, many economists think the role of the federal government in the economy should be _