MAC - Fiscal Policy Lesson

Fiscal Policy

Fiscal policy simply refers to the government’s spending and taxing decisions. The government can use fiscal policy to promote price stability, full employment, and economic growth. Don’t worry; it’s way simpler than monetary policy!

If the economy is experiencing rising unemployment, the government simply needs to spend more money or encourage consumers to spend more money by lowering their taxes. We’ll talk more about taxes in a moment.

If the economy is growing and inflation starts to get out of hand, the government will spend less money and discourage consumer spending with higher taxes.

A lot of fiscal policy stabilizes the economy automatically through government programs that change depending on GDP and a person’s income. Some examples of automatic stabilizers are taxes, which go down when income decreases, and transfer payments (welfare, financial aid, Social Security, etc), which increase during economic contraction.

Ask Yourself…

  1. What is the phase/problem?
    1. Expansion/inflation
    2. Contraction/unemployment
  2. What does the government want to do to spending?
    1. Decrease
    2. Increase
  3. What should the government do to taxes?
    1. Increase
    2. Decrease
  4. What should the government do to government spending?
    1. Decrease
    2. Increase

Budget Deficits and the National Debt

Unfortunately, if the government increases spending, they may wind up spending more money than they received in tax revenues. A budget deficit occurs when the government spends more than it takes in. If the government winds up spending less than they take in, they are running a budget surplus. The last federal budget surplus occurred in 2001. The national debt is the total amount of money the federal government owes to bondholders. Every budget deficit increases the national debt. Raising taxes or spending less money can decrease a budget deficit.

Fiscal Policy Practice

Types of Taxes

Types of Taxes
Proportional Taxes Progressive Taxes Regressive Taxes
Percentage of income paid in taxes remains the same for all income levels Percentage of income paid in taxes increases as income increases Percentage of income paid in taxes decreases as income increases
Whether income goes up or down, the percentage of income paid remains the same People with very small incomes might pay no tax at all This is sales tax!
A CEO makes $350,000 per year and a nurse makes $50,000 per year, they will both pay a 6% proportional tax As income rises, the percentage of income paid in taxes also rises. Someone who doesn't make much money is hurt by regressive taxes.

Income taxes, which are based on a person or corporation’s earnings, are typically progressive. Another progressive tax is an estate tax, which is determined by the total value of money and property a person has when they die.  A sales tax is the most well-known regressive tax. Two other types of taxes are property taxes and capital gains taxes. Property taxes are assessed on property owners and fund public goods and services like public schools. Capital gains taxes are paid on the sales of assets like stocks.

Taxes Practice

Fiscal Policy Vocabulary Review

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