Fiscal Policy

Fiscal Policy

• Change in expenditure or tax revenues of federal gov't
• 2 Tools: Taxes and Spending (decrease or increase)

Deficit, Surpluses and Debt

• Balanced Budget - Revenue = Expenditures
• Budget Deficit - Revenues < Expenditures
• Budget Surplus - Revenues > Expenditures
• Gov't Debt - sum of all deficits - sum of all surpluses

• Gov't borrows money from:
• Individuals
• Corporations
• Financial Institutions
• Foreign entities or foreign govts

Fiscal Policy, Two Options

• Discretionary Fiscal Policy (action)
• Expansionary fiscal policy - think deficit
• Contractionary Fiscal Policy - think surplus
• Non-Discretionary Policy (no action)

Discretionary v. Automatic Fiscal Policies

• Discretionary
• Increasing it decreasing government spendings and/or taxes in order to return the economy to full employment. Discretionary policy involved 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 current economic problems.

Contractionary v. Expansionary Fiscal Policy

• Contractionary - Designed to decrease AD
• Used for controlling inflation
• Expansionary - Increase AD
• Used to increase GDP, combat recession, reducing unemployment

• Expansionary Fiscal Policy
• ~ Recession is countered with expansionary policy
• Increase Gov't spending
• Decrease taxes

• Contractionary Fiscal Policy
• Decrease Gov't spending
• Increase taxes

Automatic or Built-In Stabilizers

• Anything that increases Gov't's budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policymakers

1. Welfare Checks
2. Food stamps
3. Unemployment checks
4. Corporate dividends
5. Social Security
6. Veteran's Benefits

• Progressive Tax System - Avg. Tax rate (tax revenue/GDP) rises w/ GDP
• Proportional Tax System - Avg. Tax rate remains constant as GDP changes
• Regressive Tax System - Avg. tax rate falls w/ GDP