Fiscal Policy

Fiscal Policy Notes from Part 2 of PoMac Course

What is fiscal policy?

Policy concerning government spending and taxation. Use of government spending and taxes to influence the economy.

What is social security?

A government administered retirement program where worker contribute a portion of their earnings to the national social security trust fund.

What are the demographic changes affecting the social security supply?

1) people are living longer

2) baby boomers are retiring

What are some solutions to the issues that our aging population is causing?

1) increase the payroll tax on the employer and employee

2) increase the minimum age of retirement

3) greater means testing and increasing income taxes on individuals that make more

4) invest social security in a higher returning asset

How does the federal government raise revenue?

Through..

1) payroll taxes (income, social security, medicare)

How does a budget deficit happen?

When outlays (what is spent) exceed revenue (what is made—in income)

What is expansionary fiscal policy?

When aggregate demand increases through increased government spending and less taxes. SRAS shifts to the right.

What is contractionary fiscal policy?

When taxes increase while government spending decreases. This is done to pay off debt and prevent the economy from expanding beyond long-run capabilities. SRAS shifts to the left.

What is the marginal propensity to consume (MPC)?

It is the likelihood that an individual spends an additional dollar of income on goods and services rather than saving it. It is 0<= MPC <= 1

What is the spending multiplier?

It illustrates the total impact on spending from an initial change of a given amount. Equation —> m^s = 1/(1-MPC)