Fiscal Policy

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

-2 tools of fiscal policy: controlled by congress

• Taxes – government can increase or decrease taxes
• Spending – government can increase or decrease spending

Balanced budget

   -Revenues = Expenditures

  Budget deficit

   -Revenues < Expenditures

  Budget Surplus

   -Revenues >Expenditures

  Government Debt: Sum of all deficits – sum of all surpluses

  Government Borrows money when it runs a budget deficit from:

   -Individuals

    -Corporations

   -Financial Institutions

   -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:	Automatic:
-Increasing or decreasing government spending and/or taxes in order to return economy to full employment. -Involves policy makers doing fiscal policy in response to an economic problem.	-Unemployment compensation and marginal tax rates are examples of automatic policies that help mitigate effects of a recession and inflation. -Automatic fiscal policy takes place without policy makers.

   Contractionary Fiscal Policy – policy designed to decrease aggregate demand

• Strategy for controlling inflation

   Expansionary Fiscal policy – to increase aggregate demand

• Strategy for GDP combating recession and reducing unemployment

 Expansionary - Increase government spending (G increases) and decrease Taxes ( T decreases )

 Contractionary - Decrease government spending  (G decreases) and increase taxes  ( T increases )

Automatic or Built in stabilizers occur without government intervention.

1. Transfer Payments

      -Welfare Checks

      -Food Stamps

      -Unemployment Checks

      -Corporate Dividends

      -Social Security

      -Veteran’s benefits

    2. Progressive income taxes

-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