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A deep dive into the tools used by the legislative and executive branches to influence the economy.
Imagine the national economy is a massive ship. When it hits a storm or speeds too fast toward a cliff, who has the wheel, and which levers can they pull to keep us on course?
Quick Check
If the government wants to combat a rising inflation rate, should they implement expansionary or contractionary fiscal policy?
Answer
Contractionary fiscal policy (decreasing spending or increasing taxes).
Not all fiscal policy requires a new law. Automatic Stabilizers are built-in features that trigger without explicit government action. For example, during a recession, more people qualify for unemployment insurance, which increases spending automatically. Conversely, Discretionary Fiscal Policy requires 'deliberate' action, such as Congress passing a specific stimulus bill or a new infrastructure project. While automatic stabilizers act quickly to dampen economic swings, discretionary policy allows for targeted, large-scale intervention but often suffers from 'legislative lag'—the time it takes to pass a law.
Determine if the following are Automatic or Discretionary: 1. A law is passed to build a new national highway system: Discretionary. 2. As an individual's income rises, they move into a higher tax bracket and pay a higher percentage: Automatic. 3. The government issues a one-time tax rebate check to all citizens: Discretionary.
Why is a sales tax considered regressive? 1. Person A earns and spends on taxable goods. They pay in tax, which is of their total income. 2. Person B earns and spends on taxable goods. They pay in tax, which is only of their total income. 3. Even though the rate is the same, the burden is heavier on the lower income earner.
Quick Check
In a proportional tax system, if the tax rate is 15%, how much tax does someone earning 40,000?
Answer
The 15,000 and the 6,000.
Which of the following is an example of an automatic stabilizer?
If the Marginal Propensity to Consume () is , what is the Tax Multiplier?
A regressive tax takes a higher percentage of income from high-income earners than from low-income earners.
Review Tomorrow
In 24 hours, try to recall the difference between the spending multiplier and the tax multiplier. Why is the tax multiplier always negative and smaller?
Practice Activity
Look at your last store receipt. Calculate what percentage of a 200,000/year income to see the regressive nature of sales tax in action.