FISCAL POLICY

-Changes in expenditures or tax revenues of the federal government.

TOOLS OF FISCAL POLICY

-Taxes: government can increase or decrease taxes.

-Spending: government can increase or decrease spending.

DEFICITS, SURPLUSES AND DEBT

Balanced Budgets

-Revenues = Expenditures.

Budget Deficit

-Revenues < Expenditures.

Budget Surplus

-Revenues > Expenditures.

Government Debt

-Sum of all deficit - sum of all surpluses.

Government must borrow money and its run a budget deficit.

Government borrows money from:

-Individuals.

-Corporations.

-Financial Institutions.

-Foreign entities or government.

FISCAL POLICY TWO OPTIONS

Discretionary Fiscal Policy(action)

-Expansionary Fiscal Policy- think deficit.

-Contractionary Fiscal Policy- think surplus.

Non-Discretionary Fiscal Policy(no action)

DISCRETIONARY FISCAL POLICY

-Increasing or decreasing government spending and/or taxes in order to return the economy to full        employment.

-Discretionary policy involves policy makers doing fiscal policy in response to an economic problem.

AUTOMATIC FISCAL POLICY

-Unemployment compensation and marginal tax rates are examples of automatic policies that help    mitigate the effects of recession and inflation.

-Automatic fiscal policy takes place without policy makers having to respond to current economic  problems.

EXPANSIONARY FISCAL POLICY

-Combat a recession.

-Government spending increases.

-Taxes decreases.

CONTRACTIONAL FISCAL POLICY

-Combat inflation.

-Government spending decreases.

-Taxes increases.

TYPES OF TAXES

PROGRESSIVE TAX SYSTEM

-Average tax rate(tax revenue/ GDP) rises with GDP.

PROPORTIONAL TAX SYSTEM

-Average tax rate remains constant as GDP changes.

REGRESSIVE TAX SYSTEM

-Average tax rate falls with GDP.

AUTOMATIC OR BUILT-IN STABILIZERS

-Anything that increases the government's budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policymakers.