Discretionary- increasing or decreasing government spending and taxes in order to return the economy to full employment. Involves policy makers doing fiscal policy in response to an economic problem.
-Automatic- unemployment. Compensation and marginal tax rates are examples of automatic policies that help mitigate the effects of recession and inflation. Automatic fiscal policy takes place without policy makers having to respond to current economic problems.
-Contractionary fiscal policy- policy designed to decrease aggregate demand
• strategy for controlling inflation
- Expansionary fiscal policy- policy designed to increased aggregate demand
• Strategy for increasing GDP, combAtting a recession &reducing unemployment
• increase government spending (G)
• decrease taxes (T)
-Contractionary fiscal policy
Anything that increases the government budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policymakers.
- Transfer payment: welfare checks, food stamps, unemployment checks, corporate dividends, social security, veteran's benefits
2. Progressive income taxes
automatic stabilizers take 33-50% out.
Stabilizers are like a thermostat maintaining temperature. They are shock absorbers.
- Progressive tax system
• average tax rate ( tax revenue/ GDP) rises with GSP
-Proportional tax system
• average tax rate remains constant as GDP changes
- Regressive tax system
• Average tax rate falls with GDP
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