Fiscal Policy

Fiscal Policy = Changes in the expendetures 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.

-Fiscal Policy is enacted to promote our nations economic goals: Full employment, price stability, economic growth.

Deficits,Surpluses, and Debt

Balanced Budget
-Revenues = expenditures

Budget Deficit
-Revenues< Expenditures

Budget Surplus
-Revenues>Expenditures

FORMULA : Government Debt= Sum of all deficits - Sum of all surpluses

Government borrows from
-Individuals
-Corporations
-Financial Institutions
-Foreign entities or foreign governments

Fiscal Policy, two options

Discretionary fiscal Policy
-Expansionary Fiscal Policy- think deficit
-Constructionary 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 otder to return the conomy to full employment. Discretionary policy involves policy makers doing fiscal policy in response to an economy 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 having to respond to current economic problems.



Expansion fiscal policy:
Increase government spending (G^)
Decrease taxes (T⌄)
Notice that the PL increase. This means expansionary fiscal policy creates some inflation

Contractionary fiscal policy

Decrease government spending (G)
Increase taxes (T^)

Weaknesses of fiscal policy:

Lags
-inside lag: takes time to recognize economic problems and to promote solutions to the problems.
-outside lag: it takes time to implement solution to problem

Supply side policies

Stimulate production supply to spur output

Cut taxes and government regulations to incentives for businesses and individuals.

Businesses invest Ana expands creating jobs people work save and spend more.

Increasing investment and productivity leads to increased output

Demand side policies

Stimulate consumption of goods and services (demand to spur output)

Cut taxes or increase federal spending to put money into people’s hands

With more money People buy more

Businesses increase output to meet growing demand

Automatic or built in stabilizers:

Anything that increases the government budget deficit during a recession and increased its budget surplus without requiring explicit access by policy makers.

Transfer payments:
-welfare checks
-food stamps
-payment checks
-corporate dividends
-social security
-veterans benefits

Tax system 

Progressive tax system
-average tax rate (tax revenue/GDP) rises with GDP

proportional tax system
-average tax rate remains constant as GDP changes

Progressive  tax system
-average tax rates falls within GDP