Fiscal policy

• Changes in the expenditures or tax revenues of fiscal gov't
• - 2 Tools of fiscal policy:
• Taxes - government can increase or decrease taxes
• Spending- government can increases or decreases spending
• Fiscal- is enacted to promote our nation's economic good: full employment, price stability, economic growth

Deficits Surplus and Debt

• Balance budget
• Revenues =Expenditures
• Budget deficit
• Revenue < expenditures
• Budget Surplus
• Revenues > expenditures

Government borrows from

• individuals
• corporations
• financial institutions
• foreign entities or foreign government

Fiscal Policy Two options

•  Discretionary fiscal policy (action)
• Expensionary fiscal policy (think deficit)
• Discretionary Fiscal Policy(think deficit)
• Contractionary Fiscal Policy-think surplus
• Non-Discretionary Fiscal Policy (action)

Discretionary v 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
• Automatic 
• unemployment compensation & marginal tax rates are examples of automatic policies that help mitigate the effect of recession and inflation. Automatic fiscal policy takes places with out policy makers having to respond to current economic problems

Contractionary VS Expansionary Fiscal Policy

• contractionary fiscal policy: policy designed to decreased aggregate demand
• strategy for controlling inflation
• Expansionary fiscal policy - policy designed to increase aggregate demand
• strategy for increasing GDP, combating a recessionary &reducing unemployment

Expansionary Fiscal policy

• increase government spending 
•  decrease  taxes
• notice that the PL increase

Contractionary Fiscal Policy

• decrease government spending
• Increase taxes

Automatic or Built- In stabilizers.

• Anything that increases the government budget deficit during a recession and increases its budget surplus during inflation without requiring action by policy makers
• Taxes reduce spending Aggregate demand
• Reduction spending  

Transfer payment

•  welfare check
•  food stamping
•  unemployment checks
•  corporate dividends
•  social security
• veteran benefits

Progressive Tax system
Average tax rate ( tax revenue/ GDP)

  Proportional Tax System
Average Tax rate remains constant as GDP changes

Regressive Tax System
Average tax rate falls