Introduction to Economics Government Revenue &

Expenditure: The Fiscal System

. MACROECONOMIC POLICIES Overview of Macroeconomics Policy  Fiscal Policy Influencing
the levels of aggregate output and employment or prices through changes in federal government
purchases, transfer payments, and/or taxes.  Monetary Policy Influencing levels of aggregate output
and employment or prices through changes in interest rates and the money supply.

. Categories of Government Expenditures . Government purchases of goods & services

Government spending on new goods and services  Public good – good/service provided to society. 
Quasi public good - government-provided good that could be sold in a private market. ii. Transfer
Payments Money from the government for which no direct work is required in return. iii. Others Interest
paid on borrowed funds; grants-in-aid to state and local governments OVERVIEW OF GOVERNMENT
EXPENDITURES & REVENUES

. OVERVIEW OF GOVERNMENT EXPENDITURES & REVENUES GOVERNMENT EXPENDITURE

GOVERNMENT OPERATING EXPENDITURE GOVERNMENT DEVELOPMENT EXPENDITURE General
administration Social services Economic services Defense and security

OVERVIEW OF GOVERNMENT EXPENDITURES & REVENUES

8.  Tax refers to financial charge or levy imposed on the eligible taxpayers  Important feature of tax
system is the percentage of the tax burden relative to income or consumption  Each term/type
describe the way the rate progresses from low to high, vice versa, or proportionally.  Each term
describe different distribution effect of tax on the income or consumption

texs are the main government source of revenue

. TERMS OF TAX STRUCTURE 1.
1 Progressive Tax  Tax reflecting a direct relationship between the percentage of income taxed and
the size of the income.  As income increases, so too does the rate at which that income is taxed, and
vice versa.

2. Proportional Tax (flat tax)  Tax equal to the same percentage of income regardless of the size of the
income.  As income increases or decreases, the rate at which that income is taxed remains constant. 3.
Regressive Tax  Tax reflecting an inverse relationship between the percentage of income taxes and the
size of the income.  As income increases, the rate at which that income is taxed decreases, and vice
versa.

11. FISCAL POLICY  Fiscal Policy Influencing the levels of aggregate output and employment or prices
through changes in government purchases, transfer payments, and/or taxes.

. TYPES OF FISCAL POLICY BY MECHANISM EXPANSIONARY FISCAL POLICY CONTRACTIONARY

FISCAL POLICY
.  Two ways of managing the fiscal policy:
1. Automatic Fiscal Policy • Also called automatic stabilization. • Changes in government expenditures
and/or taxes that occur automatically as the level of economic activity changes to control unemployment
or demand-pull inflation.

2. Discretionary Fiscal Policy • Deliberate changes in government expenditures and/or taxes to

control unemployment or demand- pull inflation. FISCAL POLICY

FISCAL POLICY Discretionary Fiscal Policy Expansionary:

1 Unemployment due to a decline in spending - resolved by any or all of the following tools

: • Increase government purchases of goods & services • Increase transfer payments

• Decrease taxes

. FISCAL POLICY Discretionary Fiscal Policy Contractionary:

Demand-pull inflation from too much spending - resolved by any or all of the following tools: • Decrease
government purchases of good & services

• Decrease transfer payments • Increase taxes

. SUMMARY OF FISCAL POLICY

. In what phase of a business cycle would contractionary fiscal policy be appropriate? Describe how it will
take effect during the phase.

REVIEW

. TYPES OF GOVERNMENT BUDGETS

1. BALANCED BUDGET The government’s total expenditure is equal to its total revenue

. 2. SURPLUS BUDGET The government’s total expenditure is less than its total revenue.

3. DEFICIT BUDGET The government’s total expenditure is more than its total revenue.

. CONTRACTIONARY POLICY
• Contractionary policy is designed to enlarge the budget surplus or reduce budget deficit.

• This is to dampen aggregate spending thus aid in managing demand-pull inflation. EXPANSIONARY
POLICY

• Expansionary policy is designed to enlarge the budget deficit or reduce budget surplus

. • This will increase the aggregate spending and help to reverse a recession. BUDGET & FISCAL POLICY
RELATIONSHIP

. National Debt
• Government, public or sovereign debt
• Money (credit) owed by a central government. Financing the National Debt

• Issued by government in return for funds lent to it.

• Largest portion of the national debt is held by private investors, and the rest is owned by the central
banks, government agencies, and trusts. NATIONAL DEBT

. SOURCES OF NATIONAL DEBT NATIONAL DEBT INTERNAL SOURCES EXTERNAL SOURCES

. SOURCES FOR NATIONAL DEBT

• Borrowing from citizen •

Borrowing from financial institutions

• Loans from the central bank • Loans from commercial bank

• International money market

• Currency loans from foreign government

• Loans from international financial institutions INTERNAL SOURCES EXTERNAL SOURCES

. Issues in assessing the National Debt

Debt Service Cost to maintain debt, measured in interest

. Crowding Out

Occurs when borrowing by the government reduces borrowing by households and businesses.
NATIONAL DEBT

. REVIEW  Identify the budget type most likely invoked during: Recession - Inflation -  Explain the
relationship between the budget type and its fiscal policy.

• Budget deficit indicate expansionary policy - increase government expenditure, transfer payment
and/or decrease the tax.

• Budget surplus indicate contractionary policy - decrease government expenditure, transfer payment
and/or increase the tax. budget deficit (enlarge deficit/ reduce surplus). budget surplus (enlarge surplus/
reduce deficit).