Fiscal Policy Notes
How does the government stabilize economy?
- Government has two different two boxes it can use
- Fiscal Policy- Action by congress to stabilize the economy.
What is Fiscal Policy?
- Change in the expenditures or taxes revenues of 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 economic growth.
What is Deficit, Surplus, & Debt?
- Balanced budget
- Revenue = Expenditures
- Budget deficit
- Revenue < Expenditure
- Budget Surplus
- Revenue > Expenditure
- Government Debt
- Sum of all deficits- Sum of all surpluses
- Government borrows from
- Individuals
- Corporations
- Financial Institutions
- Foreign entities or foreign government
What are the Fiscal Policies two options?
- Discretionary Fiscal Policy (Action)-
- Expansionary fiscal policy - DEFICIT
- Contractionary fiscal policy - SURPLUS
- Non-Discretionary Fiscal Policy ( No Action)
What are the three types of Taxes?
- Progressive Taxes- Takes a larger percent of income from high income groups (takes more from rich people) ex: Current Federal System
- Proportional Taxes (Flat Rate) - Takes the same percent from all income groups. ex:20% fiat income tax on all.
- Regressive Taxes- Takes laeger percent from low income groups (takes more from poor people) ex: Sales Taxes
What is Contractionary Fiscal Policy?
- (The BRAKE) Laws that reduce inflation, decrease GDP (Close an inflationary gap)
- Deficit ↓ Surplus ↑
- Decrease Government Spending
- Tax Increases
- Combinations of the two
What is the Expansionary Fiscal Policy?
- (The GAS) Laws that reduce unemployment & increase GDP (Closes Recessionary gap)
- Increases Government Spending
- Decreases taxes on Consumers
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