- changes in expenditures or tax revenues of the federal Government. two tools of fiscal policy:
- Taxes- government can increase or decrease taxes.
- Spending- government can increase or decrease spending. Deficits, Surpluses and Debt
- Balanced budget - Revenues=Expenditures.
- Budget deficit - Revenues<Expenditures.
- Budget Surplus - Revenues>Expenditures.
- Government debt - Sum of all Deficits-Sum of all Surpluses.
- Government must borrow money when it runs a budget deficit.
- Government borrows from -Individuals -Corporations -Financial Institutions -Foreign Entities or Foreign Government
- Fiscal policy two options
- Discretionary fiscal policy (action) - Expansionary Fiscal Policy- think deficit. - Contractionary fiscal policy-think surplus.
- Non-Discretionary fiscal policy (no action)
Discretionary v. Automatic fiscal policies.
- Discretionary - increasing or decreasing Government 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.
- Automatic - Unemployment compensation and marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation. automatic fiscal policy takes place without policy makers having to respond to current economic problems.
("Easy") Expansionarry fiscal policy
- combat a recession
- Taxes goes down
- government spending goes up
("Tight") Contractionary Fiscal policy
- Combats Inflation.
- Government spending goes down
- Taxes goes up
Automatic or Built in stabilizers
- Anything that increases the governments budget deficit during a recession and increases its budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policymakers. examples are: social security, medicaid, medicare, unemployment, VA benefits e.t.c
Tax structures
- Progresssive Tax system - Average tax rate (tax revenue/GDP) rises with GDP.
- Proportional Tax system - Average tax rate remains constant as GDP changes.
- Regressive Tax system - Average tax rate falls with GDP.