Fiscal Policy

Fiscal policy

3-6-17

Fiscal policy: Congress action to control government changes in the expenditures or tax revenues of federal government

2 tools of fiscal policy

1. Taxes - government can increase or decrease taxes
2. Spending - government can increase or decrease spending

Fiscal policy was enacted to promote our nation's economic goals: full employment, price stability, economic growth

Deficits, surpluses, budgets

• Balanced budget: revenues = expenditures
• Budget deficit: revenue < expenditures
• Budget surplus: revenues > expenditures

Government debt: sum of all deficits - sum of all surpluses

Government borrows money from:

1. Individuals
2. Corporations
3. financial institutions
4. foreign entities or governments

Options of fiscal policy

1. Discretionary fiscal policy (think deficit)
2. Contractionary fiscal policy (think Surplus)
3. non-discretionary fiscal policy (no action)

Three types of taxes

1. Progressive taxes are taxes that take larger percent of income from high-income groups
2. Proportional taxes or flat rates take some percent of income from all income groups
3. Regressive taxes text larger percent from low-income groups

Contractionary fiscal policy (the brake)

• Laws that reduce inflation, decrease GDP (close inflation gap)
• Government spending decrease
• tax increase
• Combination of the two

Expansionary fiscal policy (the gas)

• Laws that reduce unemployment and increase GDP (close recession gap)
• Increase government spending
• decrease taxes

Automatic / built-in stabilizers

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