Fiscal Policy -

Fiscal Policy - 

  • Fiscal Policy - Changes in the expenditures or tax revenues of the federal government
    • 2 Tools of Fiscal Policy
      • Taxes - govt can inc or dec taxes
      • Spending - govt can inc or dec spending
  • Enacted to promote our nation's economic goals: full employment, price stability, economic growth
Deficits, Surpluses, and Debit
  • Balanced budget
    • Revenues = Expenditures
  • Budget deficit
    • Revenues < Expenditures
  • Budget surplus
    • Revenues > Expenditures
  • Government debt
    • Sum of all deficits - sum of all surpluses
  • Govt must borrow money when it runs a budget deficit 
  • Govt borrows from
    • Individuals
    • Corporations
    • Financial institutions
    • Foreign entities or govts
Fiscal Policy Two Options
  • Discretionary Fiscal Policy (action)
    • Expansion fiscal policy - think deficit, enlarging, bigger, recession
    • Contractionary fiscal policy - think surplus, contract, smaller, inflation
  • Non-discretionary fiscal policy (no action)
Discretionary v. Automatic Fiscal Policies
  • Discretionary
    • Inc or dec govt spending and/or taxes in order to return the economy to full employment. 
    • Involves policymakers doing fiscal policy in response to an economic problem
  • Automatic
    • Unemployment compensation and marginal tax rates are examples that help mitigate the effects of recession and inflation
    • Takes place without policy makers having to response to current economic problem
Contractionary vs. Expansionary Fiscal Policy
  • Contractionary fiscal policy - designed to decrease aggregate demand 
    • Strategy for controlling inflation
    • Decrease government spending
    • Increase taxes
  • Expansionary fiscal policy - designed to increase aggregate demand
    • Strategy for increasing GDP, combating a recession, and reducing unemployment
    • Recession is encountered with expansionary policy
      • Increase govt spending
      • Decrease taxes
Automatic or Built-In Stabiliizers
  • Anything that increases the government's budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policymakers
  • Transfer Payments
    • Welfare checks, food stamps, unemployment checks, corporate dividends, social security, Veteran's benefits
  • Progressive Tax System
    • When GDP rises, so does tax rate
  • Proportional Tax System
    • Average tax rate remains constant as GDP changes
  • Regressive Tax System 
    • Average tax rate falls with GDP

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