business cycles and fiscal policy/taxes

fiscal policy includes

budgets, taxes, + spending

fiscal policy requires

congress + president working together

business cycles

represented by periods of expansion + contraction — cycles are affected by the actions of businesses, consumers, + the gov

4 elements of business cycles

1 - peak

2 - recession

3 - trough

4 - recovery/expansion

peak

full employment, max level of real output, inflation increases, good thing

recession

“downturn” is classified by 6+mo, widespread contraction, GDP decreases

recovery/expansion

recovery intensifies, inflation increases before full employment + full-capacity production return → “expansion” when/if it crosses old peak/trend of GDP

most common theory

spending

trough

output + employment reach lowest levels — short-lived or prolonged

taxes

pay for public goods, covers federal, state, and local spending

impact of taxes

• fiscal policy

• affects resource allocation (gov shifts $)

• affects consumer behavior (less money)

• affects the nation’s productivity + growth (GDP)

why dislike taxes

• gov can coerce people

• costs are obvious; benefits not

3 types of taxation

1 - proportional

2 - progressive tax

3 - regressive tax

proportional tax

flat, everyone pays same %

progressive tax

$ up = % up

regressive tax

$ down = % up