Unit 3: Fiscal Policy

March 29, 2018

Fiscal Policy

Fiscal Policy

• Changes in the expenditures or tax revenues of the federal government.
• There are 2 tools of fiscal policy

1. Taxes: Government can increase or decrease taxes (not at the same time)
2. Spending: Government can increase or decrease spending

• Fiscal policy is enacted to promote out 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
• Government Debt
• (Sum of all deficits) - (Sum of all surpluses)

• Borrowing Money
• The Government can borrow from:
• Individuals
• Corporations
• Financial Institutions
• Foreign Countries

Fiscal Policy Two Options

1. Discretionary Fiscal Policy (action)
• Expansionary Fiscal Policy = think deficit
• Contractionary Fiscal Policy = think surplus
2. Non - Discretionary Fiscal Policy (no - action)

Discretionary vs. Automatic Fiscal Policies

• Discretionary Fiscal Policy
• Increasing or decreasing government spending and / or taxes in order to return the economy to full employment. Discretionary involves policy makes 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 recession and inflation. Automatic fiscal policy takes place without policy makers having respond to current economic problem.

Contractionary vs. Expansionary Fiscal Policy

• Contractionary Fiscal Policy
• Policy designed to decrease aggregate demand
• strategy from controlling inflation
• Inflation is countered with contractionary policy 
• decrease government spending (G↓)
• increase taxes (T↑)
• Expansionary Fiscal Policy
• Policy designed to increase GDP, combatting a recession, and reducing unemployment
• Recession is countered with expansionary policy
• increasing government spending (G↑)
• Decrease taxes (T↓)

Automatic or Built in Stabilizers

• Anything that increases the government's budget deficit during a recession and increases its budget surplus during inflation without repairing explicit action by policy makers. 
• Economic Importance
• Taxes reduce spending and aggregate demand
• Reductions in spending are desirable when the economy iv moving toward inflation.
• Increases in spending are desirable when the economy is heading toward recession.
• Transfer Payments
• Welfare Checks
• Food Stamps
• Unemployment Checks
• Corporate Dividends
• Social Security
• Veteran's Benefits