UNIT 3

Fiscal Policy- changes in the expenditures or tax revenues of the federal government.
             

• 2 tools of fiscal policy

          1.)Taxes: government can increase or decrease spending.
          2.)Spending: government can increase or decrease spending.


Deficits, Surplus, and Deficit

• Balanced budget

          *revenues= expenditures
            (it has been 16 years since we have had one)

•  Budget deficit

           *revenues < expenditure

• Budget surplus

           *revenues > expenditures

•  Government debt

            *sum of all deficits - sum of all surpluses

• Deficits

             *government must borrow money when it runs a budget deficit
             *government borrows from:
                     1. individuals
                     2. corporations
                     3. financial institutions
                     4. foreign entities of foreign government


Fiscal Policy Two Options

•    discretionary fiscal policy (action)

           *expansionary fiscal policy (think deficit)
            *contraction fiscal policy (think surplus)
           *Non- Discretionary fiscal policy (no actions)


Discretionary VS. Automatic Fiscal Policies

Discretionary
       *Increasing or decreasing governments spending and/ or taxes in order to return the economy to full employment discretionary policy involves policy makers doing fiscal policy in response to an economic problem.


!!!!!CAN NOT HAPPEN AT THE SAME TIME!!!!!


Automatic
     *unemployment compensation and marginal tax rates are examples of automatic polices that help militate the effects of recession and inflation. Automatic fiscal policy takes place without policy makers having to respond to current economic problems.

Expansionary Fiscal Policy (easy) VS. Contraction Fiscal Policy (tight)

• Expansionary                                                 

* combat a recession                                      

*increase government spending & decreases taxes                                                   

• Contraction

*combat inflation

 * decrease government spending & increase taxes

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 expect action by policy makers.

     EX. Transfer Payments, Social Security, Medicare, Medicate, Unemployment, VA benefits

Tax Structures

•  progressive tax system 

               *average tax rate rises with GDP

***EQUATION:   tax revenue/GDP

• proportional tax system 

               *average tax rate remains constant as GDP changes

• regressive tax system

               *average tax rate falls with GDP