Chapter 12 Discretionary (or Active). The change sin the government spending and taxes are at the option of the Federal government. Nondiscretionary (passive or automatic) Expansionary fiscal policy may be in order when recession occurs. IT uses increases in government spending or tax cuts to push the economy out of recession Recession curtail investment spending and reduce aggregate demand Contractionary fiscal policy may help control demand-pull inflation. It uses decreases in government spending or increases in taxes to reduce demand-pull inflation. A built-in stabilizer is anything that increases the government?s budget deficit (or reduces its budget surplus) during a recession and increases its budget surplus during inflation without requiring explicit action by policymakers. This automatic response constitutes nondiscretionary budgetary policy and results from the makeup of most tax systems Tax revenues increase during economic expansions and decrease during recessions (Net taxes are taxes minus transfers) Progressive tax system, the average tax rate (=tax revenue/GDP) rises with GDP. Proportional tax system, the average tax rate remains constant as GDP rises. Regressive tax system, the average tax rate falls as GDP rises.
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