FISCAL POLICY

FISCAL POLICY





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Fiscal policy 
- is the changes in the expenditures or tax revenues of the federal government
- it is carried out to promote our nation's economic goals: full employment, price stability, and economic growth.

 There are two parts 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 




The government borrows from:
    • Individuals
    • Corporations
    • Financial institutions
    • Foreign entities or foreign governments


The two options for fiscal policy are:
  • Discretionary fiscal policy (action)
    • Expansionary fiscal policy -- think deficit
    • Contractionary fiscal policy -- think surplus
  • Non-discretionary fiscal policy (no action)


Discretionary fiscal policies:
- increase or decrease government spending and/or taxes in order to return the economy to full employment
- involves policymakers doing fiscal policy in response to an economic problem.
Automatic fiscal policies:
- are increased by unemployment compensation and marginal tax rates, which help mitigate the effects of recession and inflation
- it takes place without policymakers having to respond to current economic problems
Expansionary fiscal policy:
- is used to counter recessions
- the price level is increased, which means that expansionary fiscal policy creates some inflation

  • Increase in government spending (G up)
  • Decrease in taxes (T down)



Contractionary fiscal policy:
- is used to counter inflation
- the unemployment rate is increased, which means that contractionary fiscal policy creates some unemployment
  • Decrease in government spending (G down)
  • Increase in taxes (T up)


The weaknesses of fiscal policy are called lags  There are two types:
  • Inside lags take time to recognize economic problems and to promote solutions to those problems
  • Outside lags take time to put solutions to problems
Supply-side policies 
- stimulate production (supply) to create output 
- they cut taxes and government regulations to increase benefits for businesses and individuals 
- businesses invest and expand, create jobs, people work, save, and spend more
- an increase in investment and productivity lead to an increase in output
Demand-side policies
- stimulate the consumption of goods and services
- they cut taxes or increase federal spending to put money into people's hands
- with more money, people buy more. 
- businesses will increase output to meet the growing demand.
Automatic or built-in stabilizers
- anything that increases the government's budget deficit during a recession and increases its budget surplus during inflation without needing explicit action by policymakers 



Transfer payments are types of automatic stabilizers. 
examples:
  • Welfare checks
  • Food stamps
  • Unemployment checks
  • Corporate dividends
  • Social Security
  • Veteran's benefits
There are three types of tax systems: progressive, proportional, and regressive tax systems.
  • progressive tax system are when the average tax rate (tax revenue/GDP) rises with GDP
  • proportional tax system when the average tax rate remains constant as GDP changes
  • regressive tax system when the average tax rate falls with GDP

If you still doint understand, here are some vids 2 help :) :


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