Unit 3- Topic 6: Fiscal Policy

What is Fiscal Policy? Changes in the 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
• TAX ↑ SPEND ↓
• TAX ↓ SPEND ↓

Fiscal Policy is enacted to promote our nations economic goals: full employment, price stability, and economic growth.
Deficit, Surplus, Debt

• Balanced Budget- Revenues = Expenditures
• Budget Deflict- Revenues < Expenditures
• Budget Surplus- Revenues > Expenditures
• Government Debt-  (Sum of all deficits- sum of all surplus)

Government must borrow money when it runs into budget deflict
Government borrows from;

• Individuals
• Corporations
• Financial Institution (Banks)
• Foreign cities/ governments

Fiscal Policy; Two Option

Discretionary Fiscal Policy (action)

• Expansionary Fiscal Policy- think deflict
• Contractionary Fiscal Policy- think surplus
• Non Discretionary Policy- no action 

Discretionary (Governmental action)
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 (No government action)
Unemployment compensation and marginal tax rates are examples of automatic policies that helps mitigate the effects recession and inflation. Automatic Fiscal Policy takes place without policy makers having respond to current economic problems.

Contractionary Fiscal Policy- policy designed to decrease aggregate demand; strategy for controlling inflation

• Inflation is countered with contractionary policy
• Decrease government spending (G↓)
• Increase Taxes (T↑)

Expansionary Fiscal Policy- policy designed to increase aggregated demand; strategy for increasing GDP, combating a recession and reducing unemployment.

• Recession is countered with expansionary policy. 
• Increase government spending (G↑)
• Decrease taxes (T↓)

Automatic or Built- in stabilizer

• Anything that increase the government's budget deficit during a recession and increases its budget surplus during inflation WITHOUT REQUIRING EXPLICIT ACTION BY POLICY MAKERS

What Counts As a Transfer Payments?

1. Welfare Checks
2. Food Stamps
3. Unemployment Checks
4. Corporate Dividends
5. Social Security
6. Veteran's Benefits

• Progressive Tax System- Average tax rate RISES with GDP
• Proportional Tax System- Average tax rate remains CONSTANT with GDP
• Regressive Tax System- Average tax rate FALLS with GDP

Average tax rate (tax revenue/ GDP)