Download Fiscal Policy

Budget, Taxing, and Spending
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Government has a major influence in macroeconomic policy.
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2010= $2.1 Trillion received (Revenue)
2010= $3.5 Trillion spent (Expenditures)
Fiscal Policy is the method of taxing and
spending used by the Government to help
reach our macroeconomic goals.
Fiscal Policy Tools:
1)
2)
Spending
Taxing

How does the Government spend $3.5 Trillion?
How does the Government collect its revenue?
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Federal- Income Tax, Corporate Income Tax, Estate
Tax, Gift Tax, Tariffs
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State- Sales Tax, Income Tax, State Fees and
Registrations, State Lottery

Local- Property Taxes, Local (City, County, or
Township) Fees
Tax Structures
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Progressive Taxes- Tax structure where the
percentage paid in taxes increases as income
increases.
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Regressive Taxes- Tax structure where the
percentage paid in taxes decreases as income
increases.
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Ex. Income Tax
Ex. Sales Tax
Proportional Tax- Tax structure where the
percentage paid in taxes is the same for all
income levels.
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Ex. Flat Tax
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April 15
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Report income from employers (1040 form), the 1040
form helps taxpayers find out their taxable income.
 Taxable income= Gross income- exemptions and
deductions
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IRS determines how much you have paid in taxes
and how much you owe, or overpaid.
The amount that an individual owes is dependent
upon their taxable income.
Budget Process- Surplus, Deficit, or Balanced
1. Office of Management and Budget (OMB)
i.
Works with the President to put together a draft of
the budget.
2. Congress
i.
Reviews the budget draft and makes changes
3. President
i.
Signs the budget or Veto’s the budget
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Discretionary vs. Mandatory
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Discretionary- Money that policymakers get to
decide on how or how much to spend.
 Ex. Defense, Education, Environmental Research,
Foreign Aid

Mandatory- Money that is determined by law to
fund certain programs or Government functions.
 Ex. Social Security, Medicare, Medicaid, Interest on
Debt
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Expansionary vs. Contractionary
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Expansionary Policy- Increase Spending, Decrease
Taxes, Increase in Government Transfers
 Used to Stimulate the economy during a recession
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Contractionary Policy- Decrease Spending, Increase
Taxes, Decrease in Government Transfers
 Used to slow growth during an inflationary BOOM

Government Spending Multiplier= 1/mps, this gives
us the max that an increase in spending can boost
GDP.
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Tax Multiplier= mpc/mps, this gives us the max that
a decrease in taxes can boost GDP.
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Why is the Tax Multiplier smaller than the Spending
Multiplier?
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a. Draw a correctly labeled graph showing an
economy experiencing a recessionary gap.
b. What type of fiscal policy is appropriate in
this situation?
c. Give an example of what the government
could do to implement the type of policy you
listed in part b.
d. GDP is $200 billion below potential output,
how much would the Government have to cut
taxes with a MPC=.8, to bring the economy to
full-employment?
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Programs that automatically help to counteract cyclical change in the economy without any
legislative action.
Unemployment Compensation
 Corporate Profit Tax
 Progressive Income Tax
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What is happening with these programs during
a recessionary gap or inflationary gap?
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As GDP Changes:
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The automatic stabilizers change…
 Progressive Income Tax- decreases as GDP decreases…
 And increases as GDP increases
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The Effects:
 This automatic change will slow down an economy in
expansion, and stimulate an economy in recession.
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No legislative action… enough said!
Timing is everything:
Policy lag is the delay that it takes for a policy to
start impacting the economy.
 Forecasting lag is the delay that it takes for
policymakers to figure out what policy to
implement.
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Fiscal Policy that is changed by policymakers
when the business cycles change.
What can policymakers change?
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Education, Military, Agriculture, Transportation
When would discretionary fiscal policy be
used?
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Proper Timing of discretionary spending is both
difficult to achieve and crucially important.
 Good Timing= Properly stabilized business cycle change
 Bad Timing= Unnecessary business cycle fluctuation
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Automatic Stabilizers help to balance the economy
without legislative action, but they lack any potency to
rectify a severely struggling economy.
Fiscal policy doesn’t impact the economy as much as
initially presumed.
 Lessened Multiplier Effect
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Political Considerations of Fiscal Policy:
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Fiscal policy is created in a political arena
What problems could this cause?
 Politicians have an agenda that doesn’t always match
the need of the economy.
 Politicians are worried about getting elected, and
certain fiscal policy options are not popular with the
public.
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Budget Surplus vs. Budget Deficit
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Surplus= Contractionary Policy
Deficit= Expansionary Policy
Should the budget be balanced?
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Problems of prolonged deficits:
 Increased Public or National Debt
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Problems with a forced balanced budget:
 Lessens impact of fiscal policy ability
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Problems with the rising National Debt:
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Crowding Out Effect:
 As the Gov. borrows money, it pushes up interest rates
and discourages or crowds out business investment.
 Show Loanable Funds Market Graph
 Also, as our public debt increases more of our
government spending is needed to pay back interest on
our debt.
 The payments on the interest limit the gov.’ s ability to
spend on other needed areas.