CHAPTER 15

Fiscal Policy
SECTION 1: Defining Fiscal Policy SECTION 2: Fiscal Policy Strategies SECTION 3: Fiscal Policy and

the Federal Budget
1

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?

2

SECTION 1

Defining Fiscal Policy

Role taxes play in fiscal policy:
 fund government programs  influence individuals’ behavior

3

SECTION 1

Defining Fiscal Policy

Types of tax rates:
 proportional  progressive  regressive

4

SECTION 1

Defining Fiscal Policy

Most profitable taxes:
 individual income taxes  corporate income taxes  Social Security taxes  property taxes  sales taxes
5

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?

6

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
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SECTION 2

Fiscal Policy Strategies

Tools of fiscal policy:
 marginal tax rates  tax incentives  government spending  public transfer payments  progressive income taxes
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SECTION 2

Fiscal Policy Strategies

Limitations of fiscal policy:
 timing problems  political pressures  unpredictable economic behaviors  lack of coordination among government policies

9

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?

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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
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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

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SECTION 3
Fiscal Policy and the Federal Budget

Possible methods to balance the federal budget:
 increase revenues  decrease expenditures

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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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