FISCAL POLICY [2/25]

Δ in expenditures or tax revenues of federal gov. 

• taxes: gov increase or decrease tax
• spending: increase or decrease spending

balanced budget:

• revenue = expenditures

budget deficit:

• revenue < expenditures
• revenue > expenditures

gov. debt:
sum of all deficit - sum of all surplus

gov. must borrow money when it runs a budget deficit

gov. borrows from:

• individuals
• financial institutions
• corporations
• foreign entities or gov

discretionary fiscal policy (action)

• expansionary fiscal policy: think of deficit
• contractionary fiscal policy: think surplus

non-discretionary fiscal policy (no action)

discretionary: increasing or decreasing gov. spending and/or taxes in order to return the econ to full employment. discretionary policy involves policy maker doing fiscal policy in response to an econ. problem.

automatic: unemployment compensation & marginal tax rates are example of automatic policies that help mitigate the effects of recession & inflation. automatic fiscal policy takes place w/o policy makers having to respond to current econ. problem.

contractionary fiscal policy: policy designed to decrease aggregate demand. 

• strategy for controlling inflation
• decrease gov. spending 
• inc. taxes

expansionary fiscal policy: policy designed to increase AD

• strategy for inc. GDP, combating a recession and reducing unemployment
• inc. gov. spending
• decrease taxes.  

automatic or built-in stabilizers: (non-discretionary)
antyhign that inc. gov's budget deficit during a recession and inc. its budget surplus during inflation w/o requiring explicit action my policymakers.

transfer payments:

1. welfare checks
2. unemployment checks
3. social security
4. food stamps
5. corporate dividends 
6. veteran's benefit

progressive tax system:

• average tax rate (tax rev./GDP) rises w/ GDP 

proportional tax system

• avg. tax rate remains constant as GDP changes 

 regressive tax system

• avg. tax rate falls w/ GDP