Fiscal Policy

• changes in expenditures or tax revenues of the federal government

Two Tools of Fiscal Policy (ONLY TWO OPTIONS)

1. taxes - government can increase or decrease taxes
2. spending - government can increase or decrease spending

Fiscal Policy was enacted to promote our nation's economic goals :

• Full Employment
• Price Stability
• Economic Growth

Deficits, Surpluses, and Debt

• Balanced Budget
• revenues = expenditures
• what you bring out, you bring in
• Balanced Deficit
• revenues < expenditures
• you bring out more than you bring in
• Balanced Surplus
• revenues > expenditures
• you bring in more than you bring out
• Government Debt
• sum of all deficits - sum of all surpluses
• government must borrow money when it runs a budget deficit
• government borrows from :
• individuals
• corporations
• taken from both of these by taxes
• financial institutions
• foreign entities or foreign governments
• taken from both of these by buying land or investing

Fiscal Policy Two Options

1. Discretionary Fiscal Policy (action)
• Expansionary fiscal policy - think deficit (recession)
• Contractionary fiscal policy - think surplus (inflation)
2. Non - Discretionary Fiscal Policy (no action)
• Allow what happens in the economy to fix itself
• Laissez - faire
• invisible hand

Discretionary v.s. Automatic Fiscal Policies

• Discretionary
• increasing or decreasing of government spending and or taxes in order to return economy to Full Employment
• discretionary policy involves policy makers doing fiscal policy in response to an economic problem
• Automatic
• unemployment compensation and marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation
• automatic fiscal policy takes place without policy makers having to respond to the current economic problem

Contractionary v.s. Expansionary Fiscal Policy

• Contractionary Fiscal Policy -
• a policy designed to decrease AD
• strategy for controlling inflation
• decrease in government spending
• increase in taxes

• Expansionary Fiscal Policy -
• a policy designed to increase AD
• strategy for increasing GDP
• combating recession
• increase in government spending
• decrease in taxes
• reducing unemployment

Automatic / Built - In Stabilizers

• anything that increases government's budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policy makers
• tax reduce spending and AD
• reduction in spending is desirable when the economy is moving towards inflation
• increase in spending is desirable when the economy is moving towards a recession
• President is not in charge of fiscal policy, Congressmen are
• Examples of Built - In Stabilizers :
• food stamps
• social securities
• welfare checks
• unemployment checks
• corporation dividends
• veteran's benefits
• (transfer payments)
• 33 - 50 % are taken out of economy
• When the economy goes down, the President steps in to fix the problem.

Progressive Tax System

• average tax rate (tax revenue / GDP) rises with GDP

Proportional Tax System

• average tax rate remains constant as GDP changes

Regressive Tax System

• average tax rate falls with GDP