March 06, 2017

How does the government stabilize the economy?

• Actions are taken by congress to stabilize economy

Fiscal Policy

• changes in expenditures or tax revenues of federal govt
• 2 tools of fiscal policy
• taxes govt can increase or decrease taxes
• spending govt can increase or decrease spending
• Fiscal policy is encoded to promote our nation's economic goals: full employment, price stability, economic growth

Deficit, Surplus, and Debt

• Balanced budget
• revenues = expenditures
• Budget deficit
• revenues< expenditures
• Budget Surplus
• revenue> expenditures
• government debt
• sum of all deficits - sum of all surpluses
• Government must borrow money when it runs a budget deficit
• Government borrows from
• individuals, corporations, financial institution, foreign entities of foreign

Fiscal policy 2 options

• Discretionary Fiscal Policy(action)
• expansionary fiscal policy- deficit
• contractionary fiscal policy-  surplus
• Non Discretionary Fiscal Policy (no action)

3 types of taxes

• 1) progressive taxes- takes a larger percent of income from high income group
• ex: current federal income tax system
• 2) proportional taxes (flat rate)- takes same % of income from all income groups
• 3) Regressive tax- takes larger percentage from low income groups

Contractionary Fiscal Policy

• laws that reduce inflation, decrease GDP
• decrease government spending
• tax increase
• combinations of the two

Expansionary FP

• law that reduce unemployment and increases GDP
• increase government spending
• decrease tax on consumers
• combinations of the two

Automatic/Built in stabilizer

• Anything that increases govt budget deficit during recession and increases its budget surplus during inflation without requiring explicit action by policymakers
• 1) transfer payments
• welfare checks, food stamps, unemployment checks
• 2) progressive income tax
• automatic stabilizers take 33-50% out