Economics: Unit 3-Chapter 12: Fiscal Policy Options

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

2 Types of Fiscal Policy

• Taxes - Government can increase or decrease axes
• Spending - Government can increase or decrease spending

Fiscal policy is enacted to promote our nation's economic goals: full employment, price stability, economic growth

Deficits, Surpluses, and Debt

• Balanced Budget
• Revenues = Expenditures
• Budget Deficit
• Revenue is less then the expenditures
• Budget Surpluses
• Revenue is greater the the expenditures
• Government Deficit
• 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 Governments

When dealing with Fiscal Policy, their are 2 options:

1. Discretionary Fiscal Policy (action)
• Expansionary fiscal policy - think deficit
• Contractionary fiscal policy - think surpluses
2. Non-Discretionary Fiscal policy (no action)

Discretionary vs. Automatic Fiscal Policy 

Discretionary Fiscal Policy: Increasing or decreasing taxes

Automatic Fiscal Policy: Unemployment compensation and marginal tax rates are examples that help mitigate the effects of recession and inflation

Contractionary vs. Expansionary Fiscal Policy

Contractionary Fiscal Policy - Policy designed to decrease aggregate demand 

• Strategy for controlling inflation
• Counters inflation
• Decreased government spending
• Increased taxes
• Notice that the unemployment rate increased: this means contractionary 

Expansionary Fiscal Policy - Policy designed to increase aggregate demand

• Strategy for controlling GDP (combating recession, and reducing unemployment)
• Counters recessions
• Increase government spending
• Decrease taxes
• Notice that the Price Level increased: this means expansionary

Automatic or Built in Stabilizer: Anything that increases the government budget deficit during a recession and increases its budget surplus during inflation without requiring action from policy makers.

• Ex. Transfer Payments, Social Security

3 Tax Systems

• Progressive Tax System: The average tax rate that rises with GDP
• Proportional Tax System: The average tax rate remains constant as GDP changes
• Regressive Tax System: The average tax rate falls with GDP