Fiscal policy (2/25)
Changes In expenditures or tax revenues of the federal government.
2 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
•individuals
•corporations
•financial institutions
•foreign entities or foreign governments
Two options
•discretionary fiscal policy (action)
-expansionary fiscal policy -think deficit
-contractionary fiscal policy -thing surplus
•nondiscretionary fiscal policy (no action)
Discretionary
•increasing or decreasing government spending and or taxes in order to return economy to full employment. Involves policy makers doing fiscal policy in response to an economic problem.
Automatic
Unemployment compensation & marginal tax rates are examples that help mitigate the effects of recession and inflation. Takes place without policy makers having to respond to current economic problems.
Contractionary v. Expansionary fiscal policy
Contractionary- policy designed to decrease aggregate demand.
-strategy for controlling inflation
Expansionary- policy is designed to increase aggregate demand.
-strategy for increasing GDP, combatting a recession and reducing unemployment
•increases government spending
•decreases taxes
Contractionary fiscal policy
•Decreases government spending
•Increases taxes
Automatic or built in stabilizers
•anything that increases the government spending budget deficit during a recession and increases its budget and surplus without requiring explicit action by policy makers.
•welfare checks
•food stamps
•unemployment checks
•corporate dividends
•social security
•veteran's benefits
Progressive tax system
•average tax rate (tax revenue/GDP) rises with GDP
Proportional tax system
•average tax rates remains constant as GDP changes
Regressive tax systems
•average tax rate falls with GDP
Loved your precision when explaining the focal points. You really made it easier for me to understand fiscal policy and how the expansionary policy works during recession and increases AD. On the other hand, your notes explain that the contractionary policy works during an inflation.
ReplyDeleteYour notes are well organized. The bullets should have been more thorough and more explained instead of just one word. Good notes though.
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