Ch. 25
Section 3
Managing the Economy
Surpluses and Deficits

Budgets are built on forecasts or
predictions of the future

If expenses are higher than expected or
revenues for the year are lower than
expected, the budget is in trouble.
Surpluses and Deficits (cont.)

A government’s surplus is when it spends
less than it collects in revenue.

A government runs a deficit if it spends
more than it collects

When the government runs a deficit, it
must borrow money to pay its bills. It
does this by selling bonds.
Surpluses and Deficits (cont.)

A bond is a contract to repay the
borrowed money with interest at a specific
time in the future.

All the money that has been borrowed
over the years but not yet repaid is the
government’s overall debt.
Surpluses and Deficits (cont.)

The U.S. is in debt $9.6 Trillion due to the
1980’s – early 1990’s.

304 million people in the U.S., that
equates to about $31,600 for each person
if you broke it down.
Surpluses and Deficits (cont.)

When spending equals revenue collected, the
government has a balanced budget.

Federal government is not required to have a
balanced budget; can borrow as needed to pay
for services and programs

State and local governments are prohibited from
borrowing to pay for operating expenses
Fiscal Policy

One of the roles of the government is to
manage the pace of economic activity.

Remember the federal government uses
fiscal policy – the use of cutting taxes
and increasing spending to stimulate the
economy.
Fiscal Policy (cont.)

In theory, the government would cut taxes and
increase spending to stimulate economic growth.

When the economy picks up, the government
should reduce spending and increase taxes

This would create a surplus, which could
essentially lower our countries debt.
Fiscal Policy (cont.)

In actual practice, making decisions is difficult.

Despite the state of the economy, most people
in America want low taxes

At the same time, people demand to have more
government services available to them, making
it difficult for the government to cut spending

The result is the government spending when no
stimulus is needed.
Fiscal Policy (cont.)

When stimulus is needed for our economy,
politicians often argue over how the money
should be spent.

When a stimulus plan is finally agreed upon,
Appropriation Bills may take time to pass
through Congress.

By that time, the economic situation has
changed
Automatic Stabilizers

Fortunately for Americans, we do not have to
solely rely on the decisions of politicians.

Our economy has a number of automatic
stabilizers which stimulate the economy when
the time is needed.

These are already in place and do not need
further action from government
Automatic Stabilizers (cont.)
1. Unemployment insurance programs
when people lose their jobs, unemployment
payments provide help and stability until
people can find a job and get back on their
feet.
2.
Welfare programs
people can collect welfare and Medicaid when
their incomes fall below a certain level; help
prevent consumer demand from falling even
lower (which causes further worker lay-off)
Automatic Stabilizers (cont.)
3.
Progressive income tax
When people lose their jobs, their income goes
down. When this happens they pay less in
taxes which eases the impact of the cut in
income

When the economy recovers, the opposite is
supposed to occur. People make more money,
and less entitlements are needed.
Automatic Stabilizers (cont.)

Automatic stabilizers go into effect more
rapidly than fiscal policies that politicians
choose to implement.