3/6/17: Fiscal Policy

• How does the Government stabilize the economy?
• The government has two different tool boxes it can use:
1. Fiscal Policy
• Actions by congress to stabilize the economy.
• Changes the expenditures or tax revenues of the federal government.
2. Monetary Policy
• Actions by the Federal Reserve Bank to stabilize the economy. 
• 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
• Deficits, Surpluses & Debt
• Balanced Budget
• Revenues = Expenditures
• Budget Deficit
• Revenues < Expenditures
• Budget Surplus
• Revenues > Expenditures
• Government Debt
• Sum of all Deficit - Sum of all Surpluses
• Government must borrow money when it runs a budget deficit.
• Government borrows money from..
• Individuals
• Corporations
• Financial Institutions
• Foreign entities or Foreign governments
• 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
1. Progressive Taxes
• Takes a larger percent of income from high income groups (taxes more from rich people)
• Ex) Current federal income tax system.
2. Proportional Taxes (Flat rate)
• Takes the same percent of income taxes from all income groups.
• Ex) 20% flat income tax on al income groups. 
3. Regressive Taxes
• Takes a larger percentage from low income groups (poor people).
• Ex) Sales tax; any consumer tax.

• Contractionary Fiscal Policy (Break- Close inflation gap)
• Laws that reduce inflation & decrease GDP
• Decrease government spending
• Tax increases
• Combinations of the two
• Expansionary Fiscal Policy (Gas- Close recession gap)
• Laws that reduce unemployment & increase GDP
• Increase government spending
• Decrease taxes on consumers

• Automatic or Built-in Stabilizers
• Anything that increases the governments budget deficit during a recession & increases its budget surplus during inflation w/o requiring explicit action by policymakers. 
• Transfer Payments
• Welfare
• Food stamps
• Unemployment checks
• Corporate dividends
• Social Security 
• Veterans benefits