FISCAL POLICY

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FISCAL POLICY

• Notes from class activities

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Fiscal Policy - Discretionary Spending

• Government action that changes federal spending,
  tax levels, or both, which is intended to
  influence national levels of output, employment,
  and prices
• Expansionary
• Increase federal spending
• Decrease federal taxes
• Contractionary
• Decrease federal spending
• Increase federal taxes

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Political Implications of Fiscal Policy

• Would using expansionary fiscal policy to fight
  high unemployment be politically popular? WHY?
• Would using contractionary fiscal policy to fight
  high inflation be politically popular? WHY?
• Does the political response to raise or lower
  government spending or taxes mean that fiscal
  policy might be more effective in fighting
  unemployment than in fighting inflation?

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Timing Problems

• Recognition Lag the time it takes policymakers
  to recognize that unemployment or inflation have
  become a serious problem.
• Administrative Lag the time is takes to change
  government spending or taxes once the problem is
  recognized
• Operational Lag the time between adopting the
  policy change and when the policy begins to have
  an effect on the economys output, employment, or
  price levels

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Automatic Fiscal Stabilizers

• Do not require the government to take NEW actions
• Based on tax or spending programs that have
  ALREADY been voted into law
• If the economy suffers a recession/high
  unemployment,
• government spending for unemployment welfare
  increases
• revenues from income and sales taxes fall
• If the economy suffers from excessive growth/high
  inflation,
• Government spending for unemployment welfare
  decreases
• revenues from income and sales tax increase