- refers to taxing and spending by the government.
- is one of the primary tools the government can use to influence the economy.
(The other primary tool is monetary policy.)
THE U.S. FEDERAL BUDGET
A Citizen's Guide to the Federal Budget - from the Office of Management and Budget (OMB)
Budget of the U.S. Government - Fiscal Year 2000 - and related documents
Budget of the U.S. Government - Fiscal Year 1999 - and related documents
Fiscal policy affects the economy by increasing or decreasing aggregate demand.
- Aggregate Demand = Consumption Expenditures + Investment Spending + Government
Expenditures + Net Exports
- AD = C + I + G + X - M
EXPANSIONARY FISCAL POLICY
- Increasing government spending (G) increases aggregate demand (AD).
- Decreasing taxes (t) leaves households with more disposable income. Increased disposable
income encourages more consumption spending. Increased consumption expenditures (C)
increase aggregate demand (AD).
CONTRACTIONARY FISCAL POLICY
- Decreasing government spending (G) decreases aggregate demand (AD).
- Increasing taxes (t) leaves households with less disposable income. Decreased disposable income reduces
consumption spending. Reduced consumption expenditures (C) decrease aggregate demand (AD).
USING FISCAL POLICY TO FIGHT UNEMPLOYMENT
- Prior to the Great Depression, the prevailing economic thinking suggested unemployment was a short term
phenomenon which would correct itself. During the Great Depression in the United States, unemployment
persisted for a decade and was as high as 25%. John Maynard Keynes, a British economist, is generally credited
with popularizing the notion that the government can play a role stabilizing the economy. Keynes claimed the
economy needed increased aggregate demand to help the economy out of the Depression. If households and
businesses are reluctant to increase spending (e.g., because of uncertainty about future economic conditions),
increasing government spending could be an effective way to increase aggregate demand.
- Using expansionary fiscal policy can be an effective way to fight persistent, prolonged unemployment (such as
what existed in the Great Depression).
Why most economists oppose a balanced budget amendment to the Constitution - from John S. Irons, MIT.
Americans for Fair Taxation
The National Budget Simulation
Flat Tax & Alternative Tax Systems
Government & Spending
The Public Debt
Corporate Welfare - a TIME magazine investigation uncovers how hundreds of companies get on the dole - and why it
costs every working American the equivalent of two weeks' pay every year - November 9, 1998
E-mail Dr. Buck with your questions or comments.
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