McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter 11
Fiscal Policy
McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter Outline
•NONDISCRETIONARY AND
DISCRETIONARY FISCAL POLICY
•USING FISCAL POLICY TO
COUNTERACT “SHOCKS”
•EVALUATING FISCAL POLICY
McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
Fiscal Policy
•Fiscal Policy is the purposeful movement in
government spending or tax policy designed
to direct an economy
•Discretionary Fiscal Policy: government
spending and tax changes enacted at the
time of the problem to alter the economy
•Nondiscretionary Fiscal Policy: that set of
policies that are built into the system to
stabilize the economy
McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
How Nondiscretionary Fiscal
Policy Works
•Nondiscretionary fiscal policy consists of
policies that are built into the system so that
an expansionary or contractionary stimulus
can be given automatically.
•The welfare state and the progressive income
tax serve as the built-in policies.
–If the economy is in recession, those who lose
their jobs are granted unemployment and welfare
benefits and they owe less in taxes.
–If the economy is growing at an unsustainable
rate, people are making a lot of money and are
faced with higher tax rates and there are fewer
people eligible for government benefits.
McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
How Discretionary Fiscal
Policy Works
•If we are in a recession the fiscal policy to
stimulate the economy would consist of
–Increases in government spending
–Decreases in taxes
•If we are in an inflationary period the fiscal
policy to contract the economy would consist
of
–Decreases in government spending
–Increases in taxes