Fiscal Policy
- changes in expenditures or tax revenues of the federal government
Two Tools of Fiscal Policy (ONLY TWO OPTIONS)
- taxes - government can increase or decrease taxes
- spending - government can increase or decrease spending
Fiscal Policy was enacted to promote our nation's economic goals :
- Full Employment
- Price Stability
- Economic Growth
Deficits, Surpluses, and Debt
- Balanced Budget
- revenues = expenditures
- what you bring out, you bring in
- Balanced Deficit
- revenues < expenditures
- you bring out more than you bring in
- Balanced Surplus
- revenues > expenditures
- you bring in more than you bring out
- 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
- taken from both of these by taxes
- financial institutions
- foreign entities or foreign governments
- taken from both of these by buying land or investing
Fiscal Policy Two Options
- Discretionary Fiscal Policy (action)
- Expansionary fiscal policy - think deficit (recession)
- Contractionary fiscal policy - think surplus (inflation)
- Non - Discretionary Fiscal Policy (no action)
- Allow what happens in the economy to fix itself
- Laissez - faire
- invisible hand
Discretionary v.s. Automatic Fiscal Policies
- Discretionary
- increasing or decreasing of government spending and or taxes in order to return 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
- automatic fiscal policy takes place without policy makers having to respond to the current economic problem
Contractionary v.s. Expansionary Fiscal Policy
- Contractionary Fiscal Policy -
- a policy designed to decrease AD
- strategy for controlling inflation
- decrease in government spending
- increase in taxes
- Expansionary Fiscal Policy -
- a policy designed to increase AD
- strategy for increasing GDP
- combating recession
- increase in government spending
- decrease in taxes
- reducing unemployment
Automatic / Built - In Stabilizers
- anything that increases government's budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policy makers
- tax reduce spending and AD
- reduction in spending is desirable when the economy is moving towards inflation
- increase in spending is desirable when the economy is moving towards a recession
- President is not in charge of fiscal policy, Congressmen are
- Examples of Built - In Stabilizers :
- food stamps
- social securities
- welfare checks
- unemployment checks
- corporation dividends
- veteran's benefits
- (transfer payments)
- 33 - 50 % are taken out of economy
- When the economy goes down, the President steps in to fix the problem.
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
- changes in expenditures or tax revenues of the federal government
Two Tools of Fiscal Policy (ONLY TWO OPTIONS)
- taxes - government can increase or decrease taxes
- spending - government can increase or decrease spending
Fiscal Policy was enacted to promote our nation's economic goals :
- Full Employment
- Price Stability
- Economic Growth
Deficits, Surpluses, and Debt
- Balanced Budget
- revenues = expenditures
- what you bring out, you bring in
- Balanced Deficit
- revenues < expenditures
- you bring out more than you bring in
- Balanced Surplus
- revenues > expenditures
- you bring in more than you bring out
- 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
- taken from both of these by taxes
- financial institutions
- foreign entities or foreign governments
- taken from both of these by buying land or investing
Fiscal Policy Two Options
- Discretionary Fiscal Policy (action)
- Expansionary fiscal policy - think deficit (recession)
- Contractionary fiscal policy - think surplus (inflation)
- Non - Discretionary Fiscal Policy (no action)
- Allow what happens in the economy to fix itself
- Laissez - faire
- invisible hand
Discretionary v.s. Automatic Fiscal Policies
- Discretionary
- increasing or decreasing of government spending and or taxes in order to return 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
- automatic fiscal policy takes place without policy makers having to respond to the current economic problem
Contractionary v.s. Expansionary Fiscal Policy
- Contractionary Fiscal Policy -
- a policy designed to decrease AD
- strategy for controlling inflation
- decrease in government spending
- increase in taxes
- Expansionary Fiscal Policy -
- a policy designed to increase AD
- strategy for increasing GDP
- combating recession
- increase in government spending
- decrease in taxes
- reducing unemployment
Automatic / Built - In Stabilizers
- anything that increases government's budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policy makers
- tax reduce spending and AD
- reduction in spending is desirable when the economy is moving towards inflation
- increase in spending is desirable when the economy is moving towards a recession
- President is not in charge of fiscal policy, Congressmen are
- Examples of Built - In Stabilizers :
- food stamps
- social securities
- welfare checks
- unemployment checks
- corporation dividends
- veteran's benefits
- (transfer payments)
- 33 - 50 % are taken out of economy
- When the economy goes down, the President steps in to fix the problem.
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
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