Unit 3: 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
• If government increase taxes then they decrease spending and vice versa
• depending on if recession or not. If in recession then spend money 
• Fiscal policy is enacted to promote our nation's economic goals: full employment, price stability, economy grown

Deficits, Surplus, 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 a budget deficit
• Government borrows from
• Individuals (taxes)
• Corporations (taxes)
• Financial institutions
• foreign entities or foreign governments

Fiscal Policy Two Options

• Discretionary Fiscal Policy (ACTION)
• Expansionary Fiscal Policy - think deficit
• Contractionary fiscal policy - thing surplus
• Non - discretionary fiscal policy (NO action)

Discretionary VS. 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
• Congress gets together and decide what to do 
• 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 without policy makers having to respond to current economic problems
• unemployment checks keep coming unless you inform the government BUT stop once you die

Expansionary Fiscal Policy

• Recession is countered with expansionary policy
• Increase government spending (G↑)
• decrease taxes (T↓)
• G ↑, AD -->, GDP ↑, PL ↑, u% ↓, π% ↑
• T ↓, DI ↑, C ↑, GDP ↑, u% ↓, π% ↑

Contractionary Fiscal policy

• Inflation is countered with contractionary fiscal policy
• Decrease in government spending
• Increase in taxes

Weaknesses of Fiscal Policy

• Lags
• Inside lag: it takes time to recognize economic problems and to promote solutions to those problems 
• Outside lag: it takes time to implement solutions to problems 

Supply Side Policies

• Stimulate production (supply) to spur output
• Cut taxes and government regulations to increase incentives for business and individuals
• Businesses invest and expand, creating job; people work, save and spend more
• Increasing investment and productivity lead 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's budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policymakers
• Transfer payments
• Food Stamps
• Unemployment Checks
• Corporate dividends
• Social security
• Veteran's Benefit

Progressive Tax System

• Average tax rate (tax/revenue GDP) rises with GDP

Proportional Tax System

• Average tax rates=remains constant as GDP changes

Regressive tax system

• Average tax rate falls with GDP