Fiscal Policy

-Changes in the expenditures/tax revenues of the federal goverenment
*2 Tools of fiscal policy
~Taxes: Government can increase/decrease
~Spending: Government can increase or decrease spending
*Fiscal policy is enacted to promote our nation's economic goals: full employment, price stability, and economic growth

Deficits, Surpluses, and Debt
-Balanced budget: Revenues=Expenditures
-Budget deficit: Rev<Ex
-Budget surplus: Rev>Ex
-Government debt: sum of all deficits-sum of all surpluses
-Government must borrow money when it runs out from individuals, financial institutions, corporations, and foreign entities or governments (deficit)

Fiscal Policy Two Options
-Discretionary Fiscal Policy (action)
*Expansionary fiscal policy (deficit)
*Contractionary fiscal policy (surplus)
-Non-Discretionary Fiscal Policy (no action)

Discretionary vs. Automatic Fiscal Policies
-Discretionary: increasing/decreasing government 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 and marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation (takes place without policy makers having to respond to current economic problems)

Contractionary vs. Expansionary Fiscal Policy 
-Contractionary: policy designed to decrease AD (strategy for controlling inflation)
-Expansionary: policy designed to increase AD (strategy for increasing GDP, combatting a recession and reducing unemployment)

Contractionary Fiscal Policy 
-Inflation is counter with contractionary policy
decrease government spending
increase taxes

Expansionary Fiscal Policy
-Recession is countered with expansionary policy
increase government spending
decrease taxes

Progressive Tax System
-Avg tax rate (Tax/Revenue/GDP) rises with GDP

Proportional Tax System
-Avg tax rate remains constant as GDP changes

Regressive Tax System
-Avg tax rate falls with GDP
-The more progressive the tax system, the greater the economy's built in stability