Unit III Discretionary vs. Automatic Fiscal Policies

Unit III Discretionary vs. Automatic Fiscal Policies

• Discretionary
  
  
  Increasing or Decreasing Government Spending and/or Taxes in order to return the economy to full employment. Discretionary policy involves policy makers doing fiscal policy in response to an economic problem.
  
  
  Example: Recession and Inflation
  
  
• 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.

 Expansionary Fiscal Policy

• Combats Recession
• Increases Government Spending
• Decreases Taxes

Contractionary Fiscal Policy

• Combats Inflation
• Decrease in Government Spending
• Increase in Taxes

Automatic or Built-In Stabilizers

Anything that increases the government’s budget deficit during a recession and increases its budget  surplus during inflation without requiring explicit action by policy maker

Economic Importance

Taxes reduce spending and aggregate demand are desirable when the economy is moving toward inflation 

Increases in spending are desirable when the economy is heading toward recession