Unit 3: 02/29/16

Fiscal Policy

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

 There are two TOOLS of fiscal policy:

Taxes- government can increase or decrease taxes.

Spending- government can increase or decrease spending.                                                                                                                                                                                                                                      

Deficits, Surpluses, & 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 borrow money when it runs a budget deficit.

Government borrows from:                                                                                                                       -Individuals                                                                                                                        

-Corporations                                                                                                                                               -Financial Institutions                                                                                                                      Foreign Entities or Foreign Government                

Fiscal policy has only 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 Policy (Also known as Non-Discretionary)

Discretionary Fiscal Policy                                                                                                                         - increasing or decreasing Government spending and / or Taxes in order to return the economy to full employment. 
- Discretionary policy involves policy makers doing fiscal policy in response to an economic problem.

Automatic Fiscal Policy                                                                                                                               -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.

Expansionary ("EASY") fiscal policy

Combats a recession 

Taxes decrease government spending decrease

Contractionary ("TIGHT") Fiscal policy

Combats Inflation

Government spending decrease, taxes increase

 Automatic or Built in stabilizers

• Anything that increases the governments budget deficit during a recession and increases its budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policymakers. 
• Like transfer payments 

examples include... 
Social Security
Medicaid, Medicare
VA benefits e.t.c
Unemployment 

 Tax Structures

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.