Fiscal Policy
Contractionary Fiscal Policy
- Laws that reduce inflation, decrease GDP (Close an Inflationary Gap)
Decrease Government Spending
Increase Taxes (Decreasing disposable income)
Combinations of the Two
Expansionary Fiscal Policy
- Laws that reduce unemployment and increase GDP (Close a Recessionary Gap)
Increase Government Spending
Decrease Taxes (Increasing Disposable income)
Combinations of the Two
Timing and Fiscal Policy
- One of the problems of fiscal policy is that it takes time to go into effect
Recognition Lag - Congress must react to economic indicators before it’s too late.
Administrative Lag - Congress takes time to pass legislation
Operational Lag - Spending/planning takes time to organize and execute (changing taxing is quicker).