Macroeconomics Unit III: Fiscal Policy

FISCAL POLICY

• changes in the expenditures or tax revenues of the federal government
• two tools: taxes and spending
• taxes: government can increase or decrease taxes
• spending: government can increase or decrease spending

Balanced Budget

• revenues = expenditures

Budget Deficit

• revenue < expenditures

Budget Surplus

• revenue > expenditures 

Government Debt

• (sum of all deficits) - (sum of all surpluses)

Government borrows money from 

• individuals
• corporations
• financial institutions
• foreign entities or foreign governments

Fiscal Policies

Discretionary Policy (action)

• increase or decrease government spending and/or taxes in order to return the economy to full employment
• involves policy makers doing fiscal policy in response to an economy problem

Automatic

• unemployment compensation and marginal taxes that help mitigate the effects of recession and inflation
• taxes placed without policy makers having to respond to current economy problems

Contractionary Policy (surplus)

• decrease AD
• strategy for controlling inflation
• decrease government spending
• increase taxes
• inflation is countered with contractions

Expansionary Policy (deficit)

• increase AD
• increase GDP
• combating a recession and reducing unemployment
• increase government spending
• decrease taxes
• price level increased; some inflation

Automatic or built in stabilizers

• anything that increases the government budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policymakers

Transfer Payments

• welfare checks
• food stamps
• unemployment checks
• corporate dividends
• social security
• veteran's benefits

Taxes

taxes reduce the drop in disposable income during recessions and reduces the jump in disposable income during expansions. 

Progressive Income Tax

• automatic stabilizers
• take 33-50% out

Progressive Tax System

• average tax rate = (tax revenue)/(GDP)
• average tax rate rises with GDP 

Proportional Tax System

• average tax rate remains constant as GDP changes

Regressive Tax System

• average tax rate falls with GDP