Fiscal Policy & More

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

Deficits, Surpluses, and Debt
balanced budget: revenue = expenditures
budget deficit: revenues < expenditures
budget surplus: revenues > expenditures
government debt: (sum of all debts) - (sum of all surpluses)
government must borrow money when it runs a budget deficit
individuals
corporations
financial institutions
foreign entities or foreign governments

Fiscal policy
Discretionary Fiscal Policy (action)
expansionary fiscal policy (easy) : think deficit; combat a recession, increase government spending, decrease taxes
contractionary fiscal policy (tight) : think surplus; combat inflation, decrease government spending, increase taxes
Non-Discretionary Fiscal Policy (no action)
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 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.






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
Economic importance
Taxes reduce spending and aggregate demand
Reductions in spending are desirable when the economy is moving toward inflation
Increases in spending are desirable when the economy is heading toward recession
Transfer Payments
medicare, medicaid, social security, unemployment, food stamps, welfare

Taxes
Progressive tax system
average tax rate (tax revenue/GDP) rises with GDP
Proportional tax system
average tax rate remains constant as GDP changes
Regressive tax system
average tax rate falls with GDP