3.8 Fiscal Policy

The government …

speeds up or slows down the economy by using fiscal and/or monetary policy c

autonomous consumption

consumers will spend a certain amount no matter what, regardless of their income.

disposable income

income after taxes

dissaving

if incomes are less than autonomous spending

• negative savings

Fiscal Policy

actions by Congress to stabilize the economy

monetary policy

actions by the federal reserve bank to stabilize the economy

discretionary fiscal policy

• congress creates a new bill that is designed to change AD through government spending or taxation

• issue: time

Non-discretionary fiscal policy

• permanent spending or taxation laws enacted to work counter cyclically to stabilize the economy

• When GDP goes down, government spending automatically increases and taxes automatically fall.

• AKA: Automatic Stabilizers

Contractionary Fiscal Policy

laws that reduce inflation, decrease GDP (close an inflationary Gap)

• decreases government spending

• increase taxes - decreases disposable income

expansionary fiscal policy

laws that reduce unemployment and increase GDP (close a recessionary gap)

• increase government spending

• decrease taxes - increase disposable income

recognition lag

congress must react to economic indicators before it’s to late

Administrative Lag

Congress takes time to pass legislation

Operational Lag

spending/planning takes time to organize and execute (changing taxing is quicker)