Discretionary and Automatic Fiscal Policy
Wiki Entry: Discretionary and Automatic Fiscal Policy
external image clip_image002.jpg Discretionary Fiscal Policy

Discretionary Fiscal policy is the change(s) in the level of active government taxation, and spending due to changes in the economy (http://business.yourdictionary.com/discretionary-fiscal-policy ). These are changes that are often initiated in attempt to meet some/all of the goals of economics such as full employment and stable prices.

Some examples can be increasing spending on infrastructure to stimulate the economy and increase aggregate demand as well as the number of employed. Even increasing income tax to avoid high levels of consumption spending, and lower aggregate demand to keep high levels of inflation from becoming a large scale problem is another example.

The government can also spend money to increase the supply side of the economy by creating jobs through infrastructure spending; even increased spending on human capital can lead to more and better educated workers increasing the size of the labour force and then GDP.

To close recessionary/expansionary gaps the government can increase/decrease spending (G), which increases/decreases aggregate demand (AD), then increases/decreases real gross domestic product (real GDP), resulting in a increase/decrease in price (P), which is known as expansionary or contractionary fiscal policy, all respectively. The government can also affect the supply side of the economy by increasing potential GDP and therefore increasing supply and real GDP.

Income taxes and taxes to businesses can also be cut by the government. This creates more incentives for businesses to produce and workers to supply their labour, increasing the labour supply. This leads to an increase in GDP and allows the economy to grow. The government can also achieve close recessionary/expansionary gaps by decreasing/increasing income taxes (T), which increases/decreases AD, which increases/decreases real GDP, which in turn increases/decreases P; this is also known as expansionary or contractionary fiscal policy, all respectively.

The government can also achieve close recessionary/expansionary gaps by decreasing/increasing income taxes (T), which increases/decreases AD, which increases/decreases real GDP, which in turn increases/decreases P; this is also known as expansionary or contractionary fiscal policy, all respectively.

external image clip_image004.jpg Automatic Fiscal Policy

Automatic Fiscal policy are changes that are a result of past government regulations and tax laws, which are still in effect and adjust/stabilize spending in the economy without direct government intervention, through both the expansionary and recessionary periods of the business cycle (John Sayre and Alan Morris 392).

These include things such as progressive taxation, governmental assistance to agriculture and employment insurance (EI). Progressive taxation works as incomes increase/decrease, which then leads to a higher/lower tax bracket, and finally more tax revenue or a decrease in paying taxes. Government agricultural assistance shows the lowering/heightening of demand, which leads to decreasing/increasing Prices which would then lower/increase farmer’s wages however government subsidies are increased/decreased to balance out the effect of demand on their wages.




Sources cited
-Definition for discretionary policy found at: http://business.yourdictionary.com/discretionary-fiscal-policy

-In class lectures and notes on the effects of government taxation, and spending as well as the effects of progressive taxation government assistance to agriculture, and EI, as well as general information presented by Dr. Stephanie Powers in macroeconomics 101, 2011.

-Automatic fiscal policy information/definition found from (John Sayre and Alan Morris, Principles of Macroeconomics, McGraw-Hill Ryerson, 2009, page 394.)

-Images used are from Microsoft Office Word clip art.