CHAPTER 47
Fiscal Policy
LEARNING OBJECTIVES
Define and describe fiscal policy tools, and give historical examples of how they have
been used.
Compare and contrast conservative and progressive views on fiscal policy.
Discuss how budget deficits, budget surpluses, and debt enter into the debate on fiscal
policy.
OUTLINE OF CHAPTER
I. Modern Fiscal Policy
II. Government and Aggregate Demand
V. Problems with Keynesian Fiscal Policy
Administrative Problems of Fiscal Policies
Political Problems for Fiscal Policy
Political Problems with Tax Cuts
Economic Constraints on Fiscal Policy
KEY TERMS
automatic fiscal policy
policies that are fixed in place by law for the indefinite future
balanced budget
condition under which government expenditures equal taxes
Debt
occurs when the accumulated yearly budget deficits of government are greater than the budget
surpluses
Deficit
when expenditures were greater than the tax revenue in a given year
consists of decisions to spend and to tax
occurs government tax revenues exceed expenditures
ANSWERS TO END OF CHAPTER REVIEW QUESTIONS
Define and describe fiscal policy tools, and give historical examples of how they have been
used.
1. What is the difference between automatic and discretionary fiscal policy?
2. What fiscal policy finally brought the U.S. out of the Grea
Explain.
Government spending rose from 1% of GDP in 1929 to 4% during the New Deal. World
Compare and contrast conservative and progressive views on fiscal policy.
3. What problems are created by active fiscal policies according to conservative
economists?
4. Give some examples of fiscal policy that progressive economists would use to help the
economy. How would progressive economists counter conservative criticisms of fiscal
policy?
Fiscal policy to increase aggregate demand will lead to higher spending by consumers
Discuss how budget deficits, budget surpluses, and debt enter into the debate on fiscal
policy.
5. Describe how fiscal policy decisions can be constrained by high debt.
6. How would budget deficits be erased through the use of fiscal policy, according to
progressive economists?
Explain how fiscal policy should be used in a recession or if there is inflation, and describe
how the appropriate fiscal policy affects recession and inflation.
7. What fiscal policies should be used if there is a recession? Explain how they would
work.
Increase government spending and tax cuts during a recession to increase aggregate
8. What fiscal policies should be used if there is inflation? Explain how they would work.
List and describe the problems of using fiscal policy.
9. State some of the political issues/problems with fiscal policy. Give an historical
example.
The political problem of fiscal policy is the conflict of interest between corporations or
10. How might the use of fiscal policy have a negative impact on some private businesses?
Explain.
Explain how military spending affects the economy.
11. Why is military spending usually politically popular? Who benefits? Who does not
benefit?
Military spending does not face opposition from business interests. Defense contractors
12. What are some opportunity costs to military spending?
13.
APPENDIX 47.1
Fiscal Policies of Presidents Clinton and Bush
LEARNING OBJECTIVES FOR APPENDIX 47.1
Compare and contrast the fiscal policies of the Clinton and Bush administrations
OUTLINE OF APPENDIX
I. The Clinton Years, 1993-2001
ANSWERS TO APPENDIX 47.1 REVIEW QUESTIONS
Compare and contrast the fiscal policies of the Clinton and Bush administrations
1. Name some key fiscal policies used by the Bush administration (2001-2006). What was
their impact?
Bush made a number of tax cuts primarily aimed at the richest 5% of the population.
2. Name some key fiscal policies used by the Clinton administration (1993-2001). What
was their impact?
3. Explain why wages grew more slowly than productivity and GDP during the 1990s.
Unemployment was slow to fall reducing the bargaining power of labor. In addition,
Explain why there was a budget surplus in the later Clinton years.
4. Other than expansion, what contributed to a budget surplus? What spending was cut and
why?
5. What role did investment play in the expansion of the 1990s?
Explain why there is a budget deficit in the Bush years.
6. How and why has the amount of military spending differed from the Clinton
administration of the 1990s to the Bush administration of 2001-2006?
Military spending has increased enormously during the Bush administration. Military
7. What spending has been cut during the Bush administration? Increased? What has
happened to taxes?
APPENDIX 47.2
Fiscal Policies in Wars
LEARNING OBJECTIVES FOR APPENDIX 47.2
Describe and explain patterns of spending and taxes during recent U.S. wars.
OUTLINE OF APPENDIX
I. War!
ANSWERS TO APPENDIX 47.2 REVIEW QUESTIONS
Describe and explain patterns of spending and taxes during recent U.S. wars.
1. Use historical examples to demonstrate what happens to government spending during
periods of war.
Government spending during World War II increased to 40% of GDP. During the
2. What happens to taxes during period of war? Why?
Taxes are generally not raised during times of war to ensure that production and
Explain why there is an expansion during period of war and recessions after the war.
3. Explain why there is an expansion during periods of war and recessions after the war.