Federal Budget & Fiscal Policy

Definitions:

Pocket Veto - the President doesn’t do anything; if they don’t sign or veto w/in 10 days it is vetoed

Expansionary Fiscal Policy - increases spending + cutting taxes to prevent/end a recession/depression, speeds up the economy

Stimulus - given out by the gov’t to stimulate the economy

Contractionary Fiscal Policy - reduces spending + increases taxes simultaneously, slows down the economy

Spending + Revenue - the larger the difference, the more interest you have to pay

Fiscal Policy - the use of gov’t spending and taxation to influence (slow down or speed up) the economy; increases gov’t interference in supply + demand

Entitlements - SS, Medicare, Medicaid; programs people are guaranteed, increasing since pop. is aging; gov’t must increase taxes or borrow money to maintain; subject to political pressures

House of Cards - one thing can collapse it

John Maynard Keynes - General Theory of Employment; promoted gov’t involvement in the economy; wanted to give the gov’t a tool to boost the economy in the short run, instead of only in the long run

Multiplier Effect - gov’t puts a lg. sum of money into the economy that trickles down to dif. groups/people in the economy; adds to gov’t interest payments

Deficit Spending - expenditures exceed revenues; consistent in the gov’t

Milton Friedman - promoted laissez-faire policies (individual freedom in the economy)

Notes:

  • Federal Budget - 5 Steps

    • Step 1 - agencies submit spending proposals

    • Step 2 - Exec. Branch draws up the budget

    • Step 3 - Congress debates the budget (House and Senate, 2/3 must vote for it)

    • Step 4 - goes back to the White House (Sign it, Veto, or Pocket Veto)

    • Step 5 - Congress can override a veto by 2/3 majority or it can compromise w/ the President

  • Economic Schools of Thought

    • Classical Economics - free market; the economy regulates itself, supply/demand always returns to the equilibrium; no gov’t influence

    • Keynesian Economics - gov’t should buy goods/services when necessary to encourage full productive capacity, stimulate the economy, and increase employment

    • Supply-side Economics - the supply of goods drives the economy; lower taxes encourage economic activity

  • Laffer Curve - the less you tax the more people spend (less gov’t revenue), and the more you tax the less people spend (less income for citizens)