Fiscal Policy

Fiscal policy: changes in the expenditures or tax revenues of the federal government
-2 tools of fiscal policy:

1. Taxes: government can increase or decrease
2. Spending: government can increase or decreasing

Balanced budget:

revenues = expenditures

Budget deficit

revenues < expenditures

Budget surplus:

revenues > expenditures

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
• financial institutions
• foreign entities or foreign governments

Fiscal policy two options:

-discretionary fiscal policy (action)

Expansionary fiscal policy- think deficit

Contractionary fiscal policy- think surplus

-non discretionary fiscal policy (no action)

Discretionary fiscal policy: increasing or decreasing government spending and/or taxes in order to return the economy to full employment.  Discretionary policy involves policy makers doing fiscal policy in response to an economic problem

Automatic fiscal policy: 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 current economic problems

Contractionary fiscal policy: policy designed to decrease aggregate demand
-strategy for controlling inflation
-decrease government spending
-increase taxes

Expansionary fiscal policy: policy designed to increase aggregate demand
-strategy for increasing GDP,  combatting a recession and reducing unemployment
-increase government spending
-decreases taxes

Automatic or built in stabilizers: anything that increases the government's budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policy makers
-taxes reduce spending and aggregate demand
-reductions in spending are desirable when the economy is moving toward inflation

Progressive tax system: avg tax rate (tax revenue/GDP) rises with GDP

Proportional tax system: avg tax rate remains constant as GDP changes

Regressive tax system: avg tax rate falls with GDP