Fiscal Policy (03/06/17)

Fiscal Policy  

How does the government stabilize the economy?

The government has 2 different tool boxes it can use:

1. Fiscal Policy

Actions by congress to stabilize the economy.

2.Monetary Policy

Actions by the Federal reserve bank to stabilize the economy.

Fiscal Policy

Changed in expenditures or/and revenues of the federal government

- 2 tools of fiscal policy:

• Taxes- government can increase or decrease taxes.
• Spending- government can increase or decrease spending
• Fiscal Policy is enacted to promote our nation's economic goals: full employment, price stability, economic growth

Deficit, Surpluses, and Debt

• Balanced budget

-Revenues = Expenditures

• Budget Deficit

- 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 of foreign governments

Fiscal Policy

• Discretionary Fiscal Policy(action)

• Expansionary Fiscal Policy - think deficit

• Contractionary Fiscal Policy - think surplus

•  Non- Discretionary Fiscal Policy ( no action)

3 Types of Taxes

1. Progressive Taxes- takes a larger percent of income from high income group (takes more from rich people).

Ex.: Current Federal Income Tax system.

2. Proportional Taxes (flat rate) - takes the same percent of income from all income groups.

Ex.: 20% flat income tax on all income groups.

3. Regressive Tax- takes a larger percentage from low income group (takes more from poor people)

Ex.: Sales Tax; any consumption tax.

Contractionary Fiscal Policy ( The Brakes)

Laws that reduce inflation, decrease GDP (Close a inflationary Gap)

• Decrease Government spending
• Tax Increases
• Combination of the two

If in a Inflation, then G↓.: AD←.: GDPR↓ & PL↓.: u%↑ & π↓ or T↑.: DI↓.: C↓.: AD←.: GDPR↓ & PL↓.: u%↑ & π↓

  Expansionary Fiscal Policy (The Gas)
Laws that reduce unemployment and increase GDP (Close Recessionary Gap)

• Increase Government spending

• Decrease Taxes on consumption

• Combination of the two

If Recession, then G↑.: AD→.: GDPR↑ & PL↑.: u%↓ & π↑ or T↓.: DI↑.: C↑.: AD→.: GDPR↑ & PL↑.: u%↓ & π↑

• Anything that increases the government budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policy makers.

1.    Transfer Payments

Automatic or Built - In Stabilizers

A. Welfare checks

B. Food Stamps

C. Unemployment checks

D. Corporate dividends

E. Social Security 

F. Veteran's benefits