Fiscal Policy

How does the government stabilizes the economy?

•  The government has 2 different tool boxes it can use
• Fiscal Policy - Actions by congress to stabilize the economy

Fiscal Policy

• Changes in the expanditures or tax revenues of the federal government
• Tools of fiscal policy: taxes - government can increase or decrease taxes. Spending - govt. can increase or decrease spending
• Fiscal policy is enacted to promote our nations economic goals: full employment, price stability, economic growth

Deficit, Surpluses and Debt

• Balanced budget: revenues = expenditures
• Budget deficit: Revenues < expenditures
• Budget surplus: Revenues > expenditures
• Government debt: Sum of all deficit - sum all surpluses
• Govt. must borrow money when it runs a budget deficit
• Govt. borrows from: individuals, corporations, financial institutions, foreign entities or govt.

Fiscal Policy two options

• Discretionary fiscal policy (action)
• Expansionary - think deficit
• Contractionary - think surplus
• Non - discretionary (no action)

3 types of taxes

• Progressive tax - takes a larger % of income from high income groups
• Proportional taxes - takes the same % of income from all income groups
• Regressive taxes - takes a larger % from low income groups.

Contractionary Fiscal Policy

• Decrease govt. spending
• tax increases
• Combinations of the two

Expansionary Fiscal Policy

• Increase govt. spending
• decrease taxes on consumers
• Combinations of the two

Automatic or Built in stabilizers

• Anything that increases the govt. budget deficit during a recession and increase it's budget surplus during inflation without requiring explicit action by policy makers

Non-discretionary fiscal policy

• Corporate dividends
• social security
• veterans benefit

Transfer payments

• welfare checks
• food stamps
• unemployment checks

Expansionary is reduced with DI but recession reduce drops