Unit 3 Fiscal Policy notes

Fiscal policy

2 tools:

                Tax- can either increase or decrease taxes

                Spend-can either increase or decrease

Fiscal policy controlled by Congress

Deficits, surpluses, debt

Balanced budget: revenues= expenditures

Budget Deficit: revenues< 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 foreign governments

Two options

Discretionary FP (action)

                Expansionary FP think deficit

                Contractionary FP Think surplus

Non- discretionary FP (no action)

Discretionary	Automatic ( built in stabilizers)
Increasing or decreasing government spending and/or taxes in order to return the economy to Full employment. Involves policymakers responding to economic problems	Unemployment compensation and marginal tax rates examples of automatic policies that help mitigate effects of inflation and recession. Takes place without policymakers responding to economic problem Automatic stabilizers Welfare checks, food stamps, unemployment checks, corporate dividends, social security, veteran’s benefits

Contractionary: designed to control inflation and decrease AD (decrease government spending and increase taxes) 

Expansionary: increase AD increase GDP fights recession and reduces unemployment (increase Government spending and decrease taxes)

Progressive tax system- average tax rate rises with GDP (tax revenue/ GDP)

Proportional tax system- average tax rate remains constant as GDP changes

Regressive Tax System- average tax rate falls with GDP