Fiscal Policy

How does the government stabilizes the economy?
Fixed Policy: actions by Congress to stabilize the economy or

Fiscal Policy

·Changes in the 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

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

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 on a budget deficit

•   Government borrows money 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)

Three Types of Taxes

·      Progressive Taxes: takes a larger percent of income from high income groups (takes more from rich people)

•  Ex: current federal income tax system

·      Proportional Taxes (flat rate): takes the same percent of income from all income groups

•  Ex: 20% flat income tax on all income groups

·      Regressive Taxes: takes a larger percentage from low income groups (takes more from poor people)

• Ex: sales tax; any consumption taxes

·      Contractionary Fiscal Policy (The BRAKE): laws that reduce inflation, decrease GDP (close a inflationary gap)

•   Decrease government spending
•  Tax increases
•  Combination of the two

·      Expansionary Fiscal Policy (The GAS): laws that reduce unemployment and increase GDP (close a recession gap)

•  Increase government spending
•   Decrease taxes on consumers