Unit 4 Fiscal Policy

Fiscal Policy

- Changes in the expenditures or tax revenues of the federal government.

2 tools of fiscal policy

1. Taxes - gov can increase or decrease taxes
2. Spending - gov can increase or decrease spending

Deficits, Surpluses, Debt

- Balanced budget
  Revenues equals expenditures
- Budget deficit
  Revenues is less than expenditures
- Budget Surplus
  Revenues is greater than expenditures
- Government Debt
- Government must borrow money when it runs a budget deficit
- Government borrows money from individuals, corporations, financial institutions, foreign entities, foreign governments.

Two options in Fiscal policy

- Discretionary fiscal policy
  Expansionary fiscal policy
  Contractioanry fiscal policy

Discretionary v. Automatic fiscal policies

Discretionary is increasing or decreasing  gov spending and or taxes in order to return to the 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.
Contractionary vs. Expansionary fiscal policy

Contractionary fiscal policy- policy designed to decrease aggregate demand
   - Strategy for controlling inflation

 Expansionary fiscal policy

 

Policy designed to increase aggregate demand
    - Strategy for Increasing GDP, combats a recession, reduces unemployment
Expansionary increases government spending and decrease taxes
Contractionary decrease government spending and increase taxes
Automatic or built in stabilizers is anything that increases the governments budget deficit during a recession and increases it's budget surplus during inflation without requiring explicit action by

Transfer payments

1. Welfare checks
2. Food Stamps
3. Unemployment checks
4. Corporate dividends
5. Social security
6. Veteran's security

Progressive tax system
   Average tax rate rises with GDP

Proportional tax system
   Average tax rate remains constant as GDP changes

Regressive Tax system
   Average tax rate falls with GDP