Fiscal Policy

To stabilize the economy, the Government has 2 tools:

Fiscal Policy - Actions by congress to stabilize the economy

Tool 1 - Taxes; Gov can increase or decrease taxes

Tool 2 - Spending:gov can increase or decrease spending

- Fiscal policy is enacted to promote our nations economic goals; full employment, price stability and economic growth

Deficits, surpluses and Debt

- Balanced budget: Revenues =  Expenditures

- Budget deficit: Revenues less than expenditures

- Budget surplus: Revenues greater than expenditures

- Gov Debt: Sum of all deficits - Sum of all surpluses

- Gov can borrow money from: individuals, corporations, financial institutions and foreign entities

Fiscal Policy - 2 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 large percent of income from high (rich) income groups

2- Proportional Taxes - Takes same percentage of income from all income groups

3- Regressive Taxes - Take larger percentage from low income groups

Contractionary Fiscal Policy (The Brake) - Laws that reduce inflation and decrease GDP

- Lowers gov spending

- Tax increases

- Combinations of the two

Expansionary Fiscal Policy (The Gas) - Laws that reduce unemployment and increase GDP

- Increase gov spending

- Decrease taxes on consumers