Unit 3 (2/25/15)

     Fiscal policy
-Changes in the expenditures or tax revenues of the federal government.
-2 tools of fiscal policy:
1) Taxes - government can increase / decrease taxes.
2) Spending

     Deficits, Surplus, and Debt
Balance budget
-Revenue = Expenditure
Budged deficit
-Revenue < Expenditures
Budget surplus
-Revenue > Expenditures
Government Debt
-Sum of all deficits - Sum of all surplus

Government must borrows $ when it runs a budget deficit.
Borrows from...
- Individuals
- Corporations
- Financial Institutions
- Foreign Entities

     Discretionary fiscal policy. (action)
- Expansionary fiscal policy: Think deficit.
- Contractionary fiscal policy: Think surplus
Non-Discretionary fiscal policy. (no action)

     Discretionary Vs. Automatic 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 politics in response to an economic problem.
- Unemployment compensation and marginal tax rates are EX. 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.

     Contractionary Vs. Expansionary fiscal policy
Contractionary
- Policy designed to decrease aggregate demand
  + Strategy for controlling inflation.
Expansionary fiscal policy
- Policy designed to increase aggregate demand
  + Strategy for increasing GDP combating the recession and reducing unemployment.
* Increase government spending G goes up
* Decrease Taxes T goes down

Contractionary fiscal policy
-Inflation is countered with contractionary policy
Decrease government spending. G goes down

Automatic built in stabilizer
-Anything that increases the government budget deficit during a recession and increases its budget surplus during an inflation without requiring explicit action by policy makers.
EX. Transfer payment, welfare, food-stamps, unemployment checks, corporate dividends, social security, and veterans ben.

Progressive tax system
-Average tax rate (Tax rev / GDP) rises with GDP.

Proportional tax system
-Average tax rate remains constant as GDP change

Regressive tax system
-Average tax rate falls with GDP