ch16 - Objectives 1 Describe the federal budget process and...

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Objectives: 1. Describe the federal budget process and explain the effects of fiscal policy. 2. Describe the Federal Reserve’s monetary policy process and explain the effects of monetary policy.
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16.1 THE BUDGET AND FISCAL POLICY Fiscal policy is the federal government’s policies toward revenue, transfers, purchases, and debt management. This has substantial effects on the distribution of income and well-being in the economy, but here we will concentrate on: the use of the federal budget to smooth the business cycle and encourage economic growth.
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16.1 THE BUDGET AND FISCAL POLICY The Federal Budget The federal budget is an annual statement of the expenditures, tax receipts, and the surplus or deficit of the government of the United States. Why annual? No reason other than convention. The “Fiscal Year” for the Federal Government runs Oct 1 to Sept 30. The government’s surplus or deficit is equal to its tax receipts minus its expenditures. That is, Budget surplus (+)/deficit (–) = Tax receipts – Expenditures
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16.1 THE BUDGET AND FISCAL POLICY The government has a budget surplus when tax receipts exceed expenditures. The government has a budget deficit when expenditures exceed tax receipts. The government has a balanced budget when tax receipts equal expenditures. The national debt is the total amount of debt outstanding, the net result of all past budget deficits and surpluses.
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16.1 THE BUDGET AND FISCAL POLICY Figure 16.1 shows the federal budget time line for fiscal 2004. Budget Time Line The President and Congress make the federal budget on the annual time line.
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16.1 THE BUDGET AND FISCAL POLICY Theory and Reality … That is the plan ; in reality, as of November 7, FY04 budget appropriation bills have still not been completed; when that happens, the government operates on ‘continuing resolutions.’ The Employment Act of 1946 Fiscal policy operates within the framework of the landmark Employment Act of 1946, in which Congress declared that: It is the continuing policy and responsibility of the Federal Government to use all practicable means . . . to coordinate and utilize all its plans, functions, and resources . . . to promote maximum employment,
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16.1 THE BUDGET AND FISCAL POLICY Council of Economic Advisers and National Economic Council The 1946 Employment Act established the President’s Council of Economic Advisers, which writes an annual Economic Report of the President, a handy review of the current state of the economy. Types of Fiscal Policy Fiscal policy can be either: Discretionary Automatic
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16.1 THE BUDGET AND FISCAL POLICY Discretionary fiscal policy A fiscal policy action that is initiated by an act of Congress. Automatic fiscal policy A fiscal policy action that happens automatically because of changes in the state of the economy. Examples include changes in payments to the unemployed and in tax receipts caused by recession or boom.
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16.1 THE BUDGET AND FISCAL POLICY Discretionary Fiscal Policy: Demand-Side Effects The Government Purchases Multiplier The government purchases multiplier is the
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