Fiscal Policy

Changes in expenditures or tax revenue as of the federal government 

2 tools: 

• Taxes - gov't can increase or decrease taxes
• Spending - government can increase or decrease spending 

Deficits, surpluses and debt 

Balanced budget:

• Revenues=expenditures

Budget deficit:

• Revenues < expenditures

Budget surplus:

• Revenues> expenditures

Gov't debt:

• Sum of all deficits- sum of all surpluses 

Gov't must borrow money when it runs a budget deficit from:

• Individuals 
• Corporations
• Financial institutions
• Foreign entities or foreign gov't 

Fiscal policy has two options 

• discretionary fp ( action) 

a.        Expansionary- think deficit 

2. Contractionary- think surplus 

• Non discretionary (no action)

Discretionary v automatic 

Disc: increasing or decreasing gov't spending and/or taxes in order to return the economy to full employment.

Disc policy involved policy makers doing fp in responds to an economic problem 

Auto: unemployment compensation and marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation. Auto fp takes place without policy makers having to respond to current economic problems.

Expansionary: combat a recession, gov't spending increase, taxes decrease

Contractionary: combat inflation, gov't spending decrease, taxes increase