11/3/25
Fiscal Policy : the use of the federal budget to pursue a macroeconomic objective
·
conducted by the government (ie congress and president)
involves changes
·
to government spending and taxes
Federal Budget
Receipts Outlays
1. personal income tax 1 transfer programs
.
2
. social security tax and 2. govt Spending on goods
other payroll taxes and services
. corporate income
3 tax . Interest payments on
3
4
. indirect taxes and the federal debt
other receipts
Expansionary us Contractionary Fiscal Policy
expansionary F P dims to promote production and employment
·
. .
·
includes increases to gout .
Spending and reductions in taxes
appropriate during recessionary gap
·
most a
·
Contractionary F P aims to promote a reduction in
.
production and employment
includes reductions in govt Spending and increases in taxes
·
.
expansionary/inflationary gap
·
most appropriate during an
Automatic Fiscal Policy
When real GDP and income in the economy are
·
growing...
·
tax receipts automatically increase because households and firms
now have higher incomes
individuals
·
gout, Spending automatically decreases because fewer
and households quality for needs tested programs
-
both contractionary fiscal
·
are policies
, 11/3/25
·
When real GDP and income in the economy are shrinkin
g..
tax receipts automatically
·
decrease , because households and firms
earn less income
A ·
govt Spending
.
automatically increases because more individuals
and households qualify for needs tested programs
-
both are expansionary fiscal policies
·
Two Discretionary Fiscal Policies
Reducing the Labor Income Tax
Labor Market Real economy
S
wage
Price SAS
374 ---
*
-
-
,
$15 310----
-iii Ap
SOM 00M 29T 30T
employment Real GDP
Reducing the Capital Gains Tax
loanable funds real economy
RIP price
S level
SAS
F
374
=
-
370
Real GDP
Fiscal Multipliers
Govt Spending multiplier :
eaGDR
.
> O
Agout spending
,
& ·
if the govt Spending multiplier equals 2 5 increase in
. .
,
an
govt .
Spending of SoB would increase real GDP by 125 billion
:Area
Tax multiplier
& ·
if the tax multiplier is -1 75 a 200B increase in taxes would reduce
,
.
real GDP by 350B
Fiscal Policy : the use of the federal budget to pursue a macroeconomic objective
·
conducted by the government (ie congress and president)
involves changes
·
to government spending and taxes
Federal Budget
Receipts Outlays
1. personal income tax 1 transfer programs
.
2
. social security tax and 2. govt Spending on goods
other payroll taxes and services
. corporate income
3 tax . Interest payments on
3
4
. indirect taxes and the federal debt
other receipts
Expansionary us Contractionary Fiscal Policy
expansionary F P dims to promote production and employment
·
. .
·
includes increases to gout .
Spending and reductions in taxes
appropriate during recessionary gap
·
most a
·
Contractionary F P aims to promote a reduction in
.
production and employment
includes reductions in govt Spending and increases in taxes
·
.
expansionary/inflationary gap
·
most appropriate during an
Automatic Fiscal Policy
When real GDP and income in the economy are
·
growing...
·
tax receipts automatically increase because households and firms
now have higher incomes
individuals
·
gout, Spending automatically decreases because fewer
and households quality for needs tested programs
-
both contractionary fiscal
·
are policies
, 11/3/25
·
When real GDP and income in the economy are shrinkin
g..
tax receipts automatically
·
decrease , because households and firms
earn less income
A ·
govt Spending
.
automatically increases because more individuals
and households qualify for needs tested programs
-
both are expansionary fiscal policies
·
Two Discretionary Fiscal Policies
Reducing the Labor Income Tax
Labor Market Real economy
S
wage
Price SAS
374 ---
*
-
-
,
$15 310----
-iii Ap
SOM 00M 29T 30T
employment Real GDP
Reducing the Capital Gains Tax
loanable funds real economy
RIP price
S level
SAS
F
374
=
-
370
Real GDP
Fiscal Multipliers
Govt Spending multiplier :
eaGDR
.
> O
Agout spending
,
& ·
if the govt Spending multiplier equals 2 5 increase in
. .
,
an
govt .
Spending of SoB would increase real GDP by 125 billion
:Area
Tax multiplier
& ·
if the tax multiplier is -1 75 a 200B increase in taxes would reduce
,
.
real GDP by 350B
