Fiscal policy

      Change in Expenditures or tax revenues of the Government.

-       2 Tools of Fiscal Policy: 1) Taxes: Government can increase or decrease taxes

-       2) Spending: Government can increase or decrease spending.

-       The Fed = Federal Reserve

-       Fiscal Policy = Run by the Fed and the President

Deficits, Surpluses, and Debt

Ø  Balanced Budget: Revenues = Expenditures

Ø  Budget Deficit: Budget Revenue < Expenditures

Ø  Budget Surplus: Budget Revenue > Expenditures

Ø  Government Debt: Sum of all Deficits- Sum of all Surpluses

Ø  Government must borrow money when it runs a budget deficit.

o   1) Individuals (taxes)

o   2) Corporations

o   3) Financial Institutions

o   Foreign entities or Governments

Fiscal Policy

Ø  Discretionary Fiscal Policy(action)

o   Expansionary Fiscal Policy – Deficit

o   Contractionary Fiscal Policy – Surplus

Ø  Non-Discretionary Fiscal Policy(No Action)

Discretionary vs. Automatic Fiscal Policy

Discretionary

Increasing or decreasing Government spending and/or taxes to return economy to full employment. This involves policymakers doing Fiscal Policy in Response to an economic problem.

Automatic

Unemployment compensation and Marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation. Automatic Fiscal Policy takes place without policymakers having to respond to current economic problems.

“Easy”	“Tight”
Expansionary Fiscal Policy	Contractionary Fiscal Policy
*Combat a recession	*Combat Inflation
*Government Spending INCREASES	*Government Spending DECREASES
*Taxes Decrease	Taxes INCREASE

·         Progressive Tax System – Average tax rate (tax revenue / GDP) rises with GDP.

·         Proportional Tax System – Average tax rate remains constant as GDP changes

·         Regressive Tax System – Average tax rate falls with GDP.