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 taxes
                2) Spending-government can increase or decrease spending
-Enacted to promote our nation's economic goals (full employment, price stability, economic growth)

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 (G) and/or taxes in order to return the economy to full employment
-Automatic
       *Transfer payments

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 (G)
                -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 (G)
                 -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