Lecture Introduction to economics: Social issues and economic thinking: Chapter 23 - Wendy A. Stock

Chapter 23 - Fiscal policy and the federal budget. After completing this unit, you should be able to: Summarize how the federal budget is allocated, describe how the government raises money through taxes and borrowing, explain the difference between government deficits and debts,…

Introduction to Economics: Social Issues and Economic Thinking Wendy A Stock Chapter 23 Fiscal Policy and the Federal Budget Copyright © 2013 John Wiley & Sons, Inc Photo Credit: © Dieter Spears/iStockphoto PowerPoint Prepared by Z Pan After studying this chapter, you should be able to: Ø Ø Ø Summarize how the federal budget is allocated Describe how the government raises money through taxes and borrowing Explain the difference between government deficits and debts Copyright © 2013 John Wiley & Sons, Inc Ø Ø Illustrate how fiscal policy impacts the economy using an aggregate demand and aggregate supply model Assess the tradeoffs associated with fiscal policy FEDERAL BUDGET – spending Ø Ø Nondiscretionary Spending is determined by current obligations, policies, and demographics, rather than by policymaker discretion (about 60%) Discretionary Spending is determined by policymaker choices (about 40%) Copyright © 2013 John Wiley Federal Spending by Category Copyright © 2013 John Wiley Federal Spending by Category Copyright © 2013 John Wiley FEDERAL BUDGET – revenue Ø Ø Ø Tax is a financial obligation placed on taxpayers Income Taxes are taxes that are based on the amount of income a taxpayer earns Progressive Income Tax System – As taxpayers’ incomes increase they are required to pay a larger percentage of that income as taxes Copyright © 2013 John Wiley Federal revenue by Category Copyright © 2013 John Wiley Federal revenue by Category Copyright © 2013 John Wiley FEDERAL BUDGET – revenue Ø Ø Income Tax Bracket is a level of income that is taxed at a different marginal tax rate Marginal Tax Rate is the tax rate on income within a tax bracket Copyright © 2013 John Wiley Income Tax Brackets and Tax Rates Copyright © 2013 John Wiley 10 Controversies Surrounding Federal Deficits and Debts Ø Income Inequality Ø Foreign-Owned Debt Ø Dangerous Levels of Debt Ø Burden on Current and Future Generations Ø Crowding Out Effect Copyright © 2013 John Wiley 16 Controversies Surrounding Federal Deficits and Debts Ø Income Inequality ØPayments on the debt cause a transfer of income from taxpayers to debt holders ØAverage U.S taxpayer tends to have lower income than the average debt holder ØDebt payment tends to transfer money from those with lower incomes to those with higher incomes Copyright © 2013 John Wiley 17 Foreign-Owned Debt Copyright © 2013 John Wiley 18 Dangerous Levels of Debt? Ø Debt-to-GDP Ratio measures the size of a country ’s debt as a percentage of the country’s gross domestic product (GDP) A high debt-to-GDP ratio indicates that a country would have a more difficult time paying back its debt Ø Ø Debt-ceiling is the congressionally mandated maximum amount of debt that the U.S government can have Copyright © 2013 John Wiley 19 Debt-to-GDP Ratios: A comparison Copyright © 2013 John Wiley 20 Burden on Current and Future Generations Ø Ø Ø Trade-off between borrowing more and spending less (or tax more) More borrowing implies a higher interest burden for the future generations Spending less (or tax more) means less benefits (or more burden) for the current generation (spending on infrastructure could also affects future generations’ benefits) Copyright © 2013 John Wiley 21 Crowding Out effect Crowding Out occurs when government borrowing pushes up interest rates, which causes a reduction in private consumption and investment Copyright © 2013 John Wiley 22 FISCAL POLICY Ø Ø Ø Fiscal Policy is the use of government spending and taxation to influence the economy Discretionary Fiscal Policy: When policymakers actively change government spending or taxation in response to changes in the economy Nondiscretionary Fiscal Policy: Automatic fiscal policy that stabilizes economic activity without active policy changes Copyright © 2013 John Wiley 23 Aggregate Demand/Aggregate Supply Model Copyright © 2013 John Wiley 24 Expansionary and contractionary FISCAL POLICIES Ø Ø Expansionary Fiscal Policy is used to increase aggregate demand Contractionary Fiscal Policy is used to decrease aggregate demand Copyright © 2013 John Wiley 25 Expansionary Fiscal Policy Copyright © 2013 John Wiley 26 Contractionary Fiscal Policy Copyright © 2013 John Wiley 27 Controversies Surrounding Fiscal Policy Ø Fiscal Policy Timing Lags Recognition lag is the time between an actual change in economic activity and the ability for policymakers and others to recognize the change Ø Administration lag is the time it takes for congress and the president to agree on what fiscal policy to use Ø Response lag is the time it takes for government agencies to put fiscal policy into place Ø Ø Fiscal Policy and Politics Copyright © 2013 John Wiley 28 Questions/Discussions What are some examples of expansionary fiscal policy? What are some examples of contractionary fiscal policy? Why might the government want to enact contractionary fiscal policy? Why might the government want to enact expansionary fiscal policy? Copyright © 2013 John Wiley 29 Key Concepts Nondiscretionary government spending • Discretionary government spending • Tax • Income taxes • Progressive income tax system • Income tax brackets • Marginal tax rate • Budget deficit • Budget surplus • Federal debt • Publically-held debt • Debt-to-GDP ratio • Debt ceiling • Crowding out Fiscal policy Copyright â 2013 John Wiley • Discretionary fiscal policy • 30 ... economic activity and the ability for policymakers and others to recognize the change Ø Administration lag is the time it takes for congress and the president to agree on what fiscal policy to. .. DEFICITS AND DEBT Ø Ø Publically-held Debt is the portion of the federal debt that is owed to public lenders (held by individuals, businesses, foreign governments, and other investors) Government-held... Dangerous Levels of Debt? Ø Debt -to- GDP Ratio measures the size of a country ’s debt as a percentage of the country’s gross domestic product (GDP) A high debt -to- GDP ratio indicates that a country