Chapter 17 Fiscal Policy and the Federal Budget.ppt

Chapter 17: Fiscal Policy and the Federal Budget Fiscal Policy -- the Federal government changing its government budget position (G - T) in order to stabilize the economy. Fiscal Policy, by its nature, alters the Federal Budget. This chapter also examines the Federal Budget, what it’s made up of, and when budget deficits can be a problem in the economy. The Federal Budget Federal Budget (or Budget) = Tax Revenues - Government Expenditure (over a given period). Federal Budget (or Budget) = Tax Revenues - (Government Purchases of Goods and Services + Transfer Payments + Interest on the National Debt). Budget Definitions Budget 0 -- Budget Deficit Budget 0 -- Budget Surplus Budget = 0 -- Balanced Budget Realistic Goal -- Balanced Budget when Y = YF. The US Federal Budget: 2003 (Billions of Dollars) Tax Revenues $1974.8 Government Expenditure $2381.3 Federal Budget -$406.5 Source: Economic Indicators, October 2005. Breakdown of Tax Revenues Personal Income Taxes = $801.8 Corporate Profits Taxes = $217.4 Taxes on Production and Imports (e.g. sales and excise taxes) = $94.0 Contributions for Social Insurance = $803.5 Other = $58.1 Breakdown of Government Expenditure Purchases of Goods and Services (G) = $725.7 Transfer Payments = $1391.2 Interest Payments = $221.5 Other = $42.9 Source: Economic Indicators, October 2005. The Budget: In Our Notation Recall variable definitions: -- T = net taxes = tax revenues - (transfer payments + interest on the national debt) -- G = government purchases of goods and services The Budget and The Budget Position Budget = T - G Budget Position (or size of deficit) = G - T The National Debt The Natio