Skip to main content

UNIT 3 - Fiscal Policy

Fiscal Policy
-changes in the expenditures or tax revenues of the fed. gov't
2 tools
>> Taxes - gov't can increase or decrease taxes
>>Spending - gov't can increase or decrease spending
Inverse Relationship
**enacted to promote our nation's economic goals: full employment, price stability, economic growth

Deficits, Surpluses, and Debt
*Balanced budget
-Revenues = Expnditures
*Budget deficit
-Revenues < Expenditures
*Budget surplus
-Revenues > Expenditures
*Gov't Debt
- sum of all deficits - sum of all surpluses
-Gov't must burrow money when it runs a budget deficit
    *gov't burrows from:
-Individuals
-Corporations
-Financial institution
-foreign entities or foreign gov't

Fiscal Policy Two Options
* Discretionary Fiscal Policy (action)
-Expansionary fiscal policy - think deficit
-Contractionary - think surplus
*Non-Discretionary
-happens on its own without government input.
Discretionary v. Automatic
Discretionary
-increasing or decreasing gov't spending and/or taxes in order to return the economy to full employment. involves policy makers doing fiscal policy in response to an economic problem.
Automatic
-unemployment compensation & marginal tax rates are examples that help mitigate the effects of recession and inflation. Takes place w/out policy makers having to respond to economic problem

Contractionary - policy designed to decrease AD
- strategy for controlling inflation
-combating inflation
-decrease G (gov't spending)
-increase T (taxes)
Expansionary - designed to increase AD
-strategy for increasing GDP, combating a recession & reducing unemployment
-Recession is countered
     -increase in G (gov't spending)
    -decrease in T (taxes)


Automatic or Built-in Stabilizers
*Anything that increases the gov't budget deficit during a recession and decreases its budget surplus during inflation w/out requiring explicit action by policymakers.
1. (Public) Transfer Payments
A. Welfare checks
B. Food Stamps
C. Unemployment checks
2. Progressive Income Taxes
3. Nondiscretionary Fiscal policy

Progressive Tax System
*Avrg. tax rate (tax revenue/GDP) rises w/ GDP
Proportional Tax System
*average tax rate remains constant as GDP changes
Regressive Tax System
*Avrg. tax rate falls w/ GDP

Comments

Post a Comment

Popular posts from this blog

Unit 1 - Business Cycles

Business Cycles --Fluctuation in economic activity that an economy experiences over a period of time -1 cycle from trough to trough -Avrg. Cycle is 5-7 yrs -Recession lasts ~ 14 months -Peaks & Troughs are meaningless b/c we never know we are in one until its over - Trough: end of a recession -if recession loses >10% of real GDP, then it is a depression Expansion - period of high (real) GDP and high employment Peak - highest point just before the unemployment rate rises Contraction - ( Recession ) real GDP decreases in a contraction period ad unemployment rises Trough -   our lowest point (often called depression)  
1 comment
Read more

UNIT 3: Consumption and Savings

Disposable Income (DI) *Income after taxes or net income DI = Gross income - Taxes 2 Options *w/ DI, households can either -consume (spending money on goods & services) -save (not spend money on goods & services)   Consumption *household spending *The ability to consume is constrained by -amount of DI -propensity to save *Do households consume if DI=0 ? -Autonomous consumption -Dissaving APC = C/DI = % DI that is spent Saving *Household NOT spending *The ability to save is constrained by -the amount of DI -prosperity to consume *Households can NOT save if DI=0 APS = S/DI = % DI that is not spent APC & APS *APC + APS = 1 *1- APC = APS *APC >1.:Dissaving *- APS .: Dissaving MPC & MPS *Marginal Propensity to Consume  (MPC) --The fraction of any change in DI that is consumed. ΔC/ΔDI -% of every extra dollar earned that is spent *Marginal Propensity to Save (MPS) --The fraction of any change in DI that is saved ΔS/...
Post a Comment
Read more

Unit 1 - Production Possibilities Graphs (PPG) and Movements

                     Production Possibilities Graphs (PPG, PPC, or PPF)   A.K.A Production Possibilities Curve or Frontier     - Each point shows trade-off -Shows alternative ways to use resources - Shows most that society can produce if it uses every available resources to best of ability Point A (Inside the curve) - Attainable, inefficient, underutilization Unemployment, Underemployment, war, famine, natural disasters Recession/Depression Point B [ Curve of the Frontier] (on the curve) attainable & efficient **Utilization of resources efficiently** Point C- (Unattainable -Outside the curve) *Technology *Economic Growth Key Assumptions Full employment (not possible w/ laziness, disabled + retired )             *80-90% factor capacity ...
1 comment
Read more