Unit 3- Fiscal Policy

Fiscal Policy: Changes in the expenditures or tax revenues of the federal government.

• 2 tools:
• Taxes: The government can increase or decrease taxes.
• Spending: The government can increase or decrease spending.
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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.
• Individuals
• Corporations
• Financial institutions
• Foreign entities or foreign governments
• Two options (Fiscal Policy)
• Discretionary Fiscal Policy (action)
• Expansionary (deficit)
• Foreign entities or foreign governments
• Discretionary: Increasing or decreasing government spending in order to return the economy to full employment.
• Automatic: Unemployment compensation and marginal tax rates.
• Takes place without policy makers having to respond to current economic problems.
• Expansionary ("Easy") Fiscal Policy
• Combats a recession
• Increased government spending
• Decreased taxes
• Contractionary ("Tight") Fiscal Policy: 
• Combats inflation
• Decreased government spending
• Increased taxes

Automatic Stabilizers

• Anything that increases the government's budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policymakers.
• Transfer payments (Social Security, medicaid/medicare, unemployment, veterans benefits)
• Progressive Tax System
• Average tax rate rises with GDP.
• Proportional
• Average tax rate remains constant as GDP changes.
•   Regressive Tax System
• Average tax rate falls with GDP.