Fiscal Policy

Fiscal Policy→changes in expenditures/tax revenues of federal govt
-2 tools of fiscal policy:

1. taxes→govt can ↑ of ↓ taxes
2. spending→govt can ↑ or ↓ spending

-was enacted to promote our nation's economic goals: FE, price stability, eco. growth

Deficits, Surpluses, + Debt

• Balanced budget→revenues=expenditures
• Budget deficit→revenues<expenditures
• Budget surplus→revenues>expenditures
• Govt debt→sum of all deficits-sum of all surpluses

**In budget deficit, govt must borrow $

-govt borrows from:

• individual 
• corporations
• financial institutions
• foreign entities/foreign govts

Fiscal Policy "Two Options"

1. Discretionary Fiscal Policy (action)

Expansionary FP (think deficit)	Contractionary FP (think surplus)
·         Designed ↑ AD ·         Strategy ↑ GDP, combat recession, and reduce unemployment (PL ↑, creates some inflation) ·         ↑ govt spending (G↑) ·         ↓ taxes (T↓)	·         Designed to ↓AD ·         Strategy for controlling inflation ·         Creates some unemployment ·         ↓ govt spending (G↓) ·         ↑ taxes (T↑)

2. Non-discretionary fiscal p. (no action)

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Discretionary FP	Automatic FP
↑ or ↓ govt spending +/or taxes in order to return economy to FE           Involves policy makers doing FP in response to an economic problem	Unemployment compensation and marginal tax rates are examples that help mitigate (lesses) effects of recession and inflation           Takes place w/out policy makers having to respond to current economic problems

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3 Tax Systems:

Progressive TS	Proportional TS	Regressive TS
Average tax rate (tax revenue/GDP) rises w/ GDP	Average tax rate remains constant as GDP changes	Average tax rate falls w/ GDP

**The more progressive the TS, the greater the economy's built-in stability.