Fiscal Policy

Fiscal Policy

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

o  2 tools of fiscal policy: controlled by congress

§  Taxes – government can increase or decrease taxes

§  Spending – government can increase or decrease spending

Deficit, Surpluses, and Debt

·       Balanced budget

o   Revenues = Expenditures

·       Budget deficit

o   Revenues < Expenditures

·       Budget Surplus

o   Revenues >Expenditures

·       Government Debt

o   Sum of all deficits – sum of all surpluses

·       Government Borrows money when it runs a budget deficit from:

o   Individuals

o   Corporations

o   Financial Institutions

o   Foreign entities or foreign governments

Discretionary Fiscal Policy (action)

·       Expansionary fiscal policy – think deficit

·       Contractionary fiscal policy – think surplus

Non –Discretionary Fiscal Policy (no action)

Discretionary vs. Automatic

·     Discretionary

o  Increasing or decreasing government spending and/or taxes in order to return economy to pull full employment.

o  Involves policy makers doing fiscal policy in response to an economic problem

·     Automatic

o  Unemployment compensation and marginal tax rates are examples of automatic policies that help mitigate effects of a recession and inflation

o  Automatic fiscal policy takes places without policy makers

Contractionary Fiscal Policy – policy designed to decrease aggregate demand

·     Strategy for controlling inflation

·     Inflation is countered

o  Government spending decrease

o  Taxes increase

   Expansionary Fiscal policy – policy designed to increase aggregate demand

·       Strategy for GDP combating recession and reducing unemployment

·       Recession is countered with expansionary policy

o   Government spending increases

o   Taxes decreases

Automatic or Built in stabilizers

·       Anything that increases the government’s budget deficit during a recession and increases its budget surplus inflation without requiring explicit action by policymakers

Automatic Stabilizers

1.   Transfer Payments

a.   Welfare Checks

b.   Food Stamps

c.   Unemployment Checks

d.   Corporate Dividends

e.   Social Security

f.     Veteran’s benefits

2.   Progressive income taxes

a.   Automatic stabilizers take 33-50% out

   Progress 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 fall with GDP