FISCAL POLICY

-changes in the expenditures or tax revenues if the federal government

-2 tools of fiscal policy

.taxes- government  Can increase or decrease taxes

.spending- government can increase or decrease taxes

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 

-corporations

-financial institutions 

-foreign entities or foreign governments

Discretionary fiscal policy (action)

-expansionary fp- think deficit

-contractionary fp- think surplus

Non-discretionary fiscal policy (no action)

Discretionary 

-increasing or decreasing government spending and/or taxes in order to return the economy to full employment directional policy involves policy makes doing fiscal policy to response to on economic problem

Automatic

-unemployment compensation & 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 problem

Expansionary fiscal policy

-combat recession

-^ govt spending ¥ lower taxes

Contractionary fiscal policy

-Combat inflation

-¥ govt spending ^ taxes

Automatic or built in stabilizers

.anything that increases the governments budget deficit during a recession and increases its budget surplus during inflation _without requiring explicit action by policy makers_

Ex. Transfer payments 

(ss, medicaid/care, unemployment, veterans benefits.)

progressive tax system- average tax rate (tax revenue/GDP) 

Proportional tax system- average tax rate constant as GDP changes

Regressive tax system- average tax rate falls with GDP