Fiscal Policy
Fiscal Policy
Changes in the expidentures or tax revenues of the federal government.
2 tools of Fiscal Policy:
-Taxes: Government can increase or decrease taxes-Spending: Government can increase or decrease taxes
Fiscal policy is enacted to promote our nation's economic goals of full employment, price stability, and economic growth.
Deficits, Surpluses and Debt
Balanced Budget: revenues = expidentures
Budget Deficit: revenues < expidentures
Budget Surplus: revenues > expidentures
Government Debt: sum of all deficits - sum of all surpluses
Government must borrow money when it runs a budget deficit
Individuals: taxes
Corporations: taxes
Financial institution
Foreign entities or foreign government
Fiscal Policy Two Options
Discretionary Fiscal Policy (action)
Expansionary Fiscal Policy: think deficit; enlarging; growing bigger; recession
Contractionary Fiscal Policy: think surplus; contract; smaller; lessen; inflation
Discretionary vs. Automatic Fiscal Policies:
Discretionary: increasing or decreasing government spending and/or taxes in order to return the economy to full employment.
Automatic: Examples: unemployment compensation and marginal tax rates; help mitigate the effects of recession and inflation; takes place without policy makers having to respond to current economic problems
Contractionary vs. Expansionary Fiscal Policy:
-Contractionary: Policy designed to decrease aggregate demand; strategy to control inflation; decrease government spending and increase taxes
-Expansionary: policy designed to increase aggregate demand, strategy for increasing GDP, combating recession and reducing unemployment; increase government spending and decrease taxes; this is because we increase price level
Automatic or Built-in Stabilizers
Anything that increases the government's budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policy makers.
Transfer payments: Welfare checks, food stamps, unemployment checks, corporate dividends, social security, and veteran's benefits.
Tax Systems:
-Progressive Tax System: average tax rate (tax revenue/GDP) rises with GDP
-Proportional Tax System: average tax rate remains constant as GDP increases
-Regressive Tax System: average tax rate falls with GDP
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ReplyDeleteI found this wonderful video (https://youtu.be/4FNdUTN4cHY) on fiscal policy, that you might find interesting. It includes a good example of how fiscal policy affects the economy in the short term.
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