14. Fiscal Policy Review    View Entire Chapter 14).  www.textbooksfree.org/Economics%20Notes.htm    Return to Macro Review 2 Chapters 14-18
      A. Economic goals of the United States
          1. Employment Act of 1946 was a reaction to a five-year economic growth plan of the Soviet Union.
              a. Set four economic goals
                 1. Economic growth   2. Price stability     3. Low unemployment     4. Positive balance of payments
              b. Created the President's Council of Economic Advisor
          2. Humphrey-Hawkins Act of 1978 was a reaction to stagflation of the 1970's and it set five-year goals for economy.
              a. 4% unemployment     b. 3% inflation by 1985, 0% by 1988     c. Reduce balance of payments deficit  
              d. Increase economic growth and investment      e. Reduce the size of the public sector
          3. Government methods of affecting the economy to achieve economic goals
              a. Fiscal policy, the focal point of Keynesian economics, will be explored in this chapter.
              b. Monetary Policy will be covered in chapter 15.
    B. Discretionary fiscal policy.
          1. Discretionary fiscal policy is the deliberate manipulation of government taxing and spending to control AD and the business cycle.
          2. AD = C + I + G + X_N
          3. Expansionary fiscal policy consists of reversing an economic downturn by increasing AD with deficit spending.
              a. Lower taxes to increase Consumption (C) and Investment (I)
                 1. Personal income taxes  
                 2. Capital gains taxes paid on the profit from the sale of commercial real estate, a company, and financial assets (stocks and bonds)
                 3  Investment tax creditis a direct lowering of the tax liability of companies investing in certain approved types of plant and equipment 
             b. Increase government spending (G)
             c. The result will be a fiscal stimulus through deficit spending. 
             d. The impact of a fiscal stimulus, once implemented, will affect AD.
         4. Contractionary fiscal policy: Decreasing inflationary pressure by decreasing AD
             a. Increase taxes
             b. Decrease government spending
             c. The result will be a fiscal drag with smaller deficits or a surplus. 
          5. The multiplier effect described in chapter 12 applies to fiscal policy measures.
     C. Automatic stabilizers
         1. Cause the economy to expand without government action during recession by increasing AD.
         2. Cause the economy to contract without government action during inflation by lowering AD.    
         3. Examples
             a. Transfer payments (unemployment compensation, food stamps, and other social programs) increase during recession to increase AD.
             b. Progressive taxes (income tax) increase during inflation to lower AD.
    D. Fiscal policy effectiveness is questionable 
         1. Timing
             a. Determining when recessions begin is difficult. 
                 1. Disagreement over whether the U.S. was in a recession from 1989-1991 resulted in little fiscal action being taken.
                 2. The 2001 slowdown happened so fast there was not time for preemptive action.
             b. Fiscal policy takes time to implement 
             c. There will be a delay because it takes business time to expand capital investment.                 
         2. Political considerations
             a. Some spending programs are difficult to cut (social security).
             b. Expansionary bias: people vote to spend but not to tax.
             c. Political business cycle: it is difficult to accomplish anything economically constructive during an election year 
         3. Until recently, many felt the federal debt is too big and has rendered fiscal policy ineffective. Its success in ending
             the 2001 recession has yet to be determined although the Federal budget surplus certainly makes it easier to increase 
             federal spending and decrease taxes although the expense of fighting three wars has again increased the deficit.
     E. Monetary affects of fiscal policy
         1. Until recently, government borrowing increased the demand for loanable funds causing higher long-term interest rates. 
             a. Crowding out is the term used to describe how high rates due to government borrowing lower private investment.
             b. Many feel high economic growth of the late 1990's resulted because of low interest rates caused by federal fiscal responsibility.   
         2. Now, people are concerned about the fiscal drag caused by a federal surplus