Fiscal policy

Fiscal Policy
-Fiscal Policy: changes in 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 decrease spending

Deficits, Surplus, and Debt
-Balanced Budget

•       Revenues = Expenditures

-Budget Deficit

•       Revenues < Expenditures

-Budget Surplus

•        Revenues > Expenditures

-Government Debt

•        Sum of all DEFICITS - Sum of all SURPLUSES

-Government must barrow money when it runs a budget deficit
       Barrows 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 v. Automatic Fiscal Policies
-Discretionary

•        Increasing or decreasing Government Spending / taxes in order to return the economy to full employment

-Automatic

•  transfer payments,unemployment, marginal tax rates

Contractionary v. Expansionary Fiscal Policy
-Contractionary fiscal policy: policy designed to DECREASE aggregate demand (AD)

•        Strategy for controlling inflation
•        Inflation countered with contractionary fiscal policy

                -Decrease government spending 
                -Increase taxes
-Expansionary fiscal policy: policy designed to increase aggregate demand (AD)

•       Strategy for increasing GDP, combating a recession, and reducing unemployment
•       Recession is countered with expansionary policy

                 -Increase government spending 
                 -Decrease 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
-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