March 6, 2017

Fiscal Policy

Fiscal Policy: Actions by congress to stabilize the economy 

• 2 Tools for Fiscal Policy
• Taxes: Government can increase or decrease taxes
• Spending: Government can increase or decrease spending
• Enacted to promote our nation's economic goals:
• Full Employment, Price Stability, Economic Growth

Balanced Budget

• Revenue = Expenditures

Budget Deficit

• Revenues < Expenditures
• Borrows from:
• Individuals
• Corporations
• Financial Institutions
• Foreign Entities/Governments 

Budget Surplus

• Revenues > Expenditures

Government Debt

• Sum of all deficits - sum of all surpluses

2 Types of Fiscal Policy

• Discretionary Fiscal Policy (Action)
• Expansionary Fiscal Policy: Deficit
• Contractionary Fiscal Policy: Surplus
• Non-Discretionary Fiscal Policy: No Actions

Taxes

1. Progressive Taxes: Taxes larger percent of income from high income groups (more from rich people)
• Ex: Current Federal Income Tax System
2. Proportional Taxes (Flat Rate): Taxes some percent of income from all groups 
• Ex: 20% from all groups
3. Regressive Taxes: Takes a larger percentage from low income groups
• Ex: Sales Taxes

Contractionary Fiscal Policy (The BREAK)

• Laws that reduce inflation, decrease GDP (Close inflationary gap)
• Decrease Government Spending
• Tax Increases
• Combinations of the 2

Expansionary Fiscal Policy (The GAS)

• Laws that reduce unemployment and increase GDP (Close recessionary gap)
• Increase Government Spending
• Decrease Taxes on Consumers
• Combinations of the 2