Fiscal Policy
Changes in expenditures or tax revenues of the federal government.
- 2 Tools of fiscal policy:
- Taxes: government can increase or decrease taxes.
- Spending: government can increase or decrease spending.
- Deficits, Surpluses, 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 borrow money when it runs aa budget deficit.
- Government borrows from
- Individuals
- Corporations
- Financial Institution
- 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 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: Unemployment compensation & 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 Fiscal Policy Contractionary Fiscal Policy Combat a recession
Increase in Government Spending
Decrease in TaxesCombat inflation
Decrease in Government Spending
Increase in 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 policymakers.
- Social security
- Unemployment
- Medicaid/Medicare
- Veterans compensation
Progressive Tax System
- Average tax rate (tax revenue/GDP)
Proportional Tax System
- Average tax rate remains constant as GDP changes
Regressive Tax System
- Average tax rate falls with GDP.
Take note that the contractionary policy is a tool to slow down and economy. In opposition, the expansionary policy is the tool to speed up the economy.
ReplyDeleteIt's very well thought out and organized. You seemed to have gone though all of the material. Something you cold have included is that Expansionary policy is known as easy money and Contractionary is known as tight money. seeing as that these words are used a lot it would clear up any confusion one might have.
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