(3-1-16) Unit III Fiscal Policy

Fiscal Policy

Fiscal Policy-
The change in expenditures or tax revenue of the federal government
-can either increase or decrease taxes or spending

Types of Budget
Balanced Budget= Rev. = Expenditures
Deficit= Rev. < Expenditures
-when in deficit, gov't borrows from
1. Individuals 2.Corporations 3. Financial Institutions 4. Foreign Entities and Countries

Surplus= Rev. > Expenditures
Gov't Debt= Sum of deficits - sum of surplus
Discretionary (action)
-Expansionary when in deficit
-combats recession
-increases gov't spending; decreases taxes
-Contractionary when in surplus
-combats inflation
-decreases gov't spending; increases taxes
-increase/decrease gov't spending or taxes to get back to FE (fiscal policy responds to economic problems that [may] occur)

Non-Discretionary (wait)
Automatic or built-in stabilizers - include unemployment compensation and marginal taxes; they happen without the use/interference of policy makers

Tax Systems
Progressive- Avg. tax rate rises with GDP (Tax revenue/GDP)
Proportional- Avg. tax rate remains constant as GDP changes
Regressive-Avg. tax rate falls with GDP
More Progressive = More Stablility