Fiscal Policy
households) T, or some combination of the two. The logic of the change is to influence the
performance of the economy.
Non-discretionary policy is really the overall framework and design of the government spending
and taxing authority. As an example, having a progressive tax system, once set up, works
automatically in the economy.
Recession
A recession could happen if C, I, G, or X fell. The short term effect was falling RGDP and
raising unemployment. The ratchet effect kept the price level from falling
The short term rising unemployment is painful and the focus of Fiscal Policy is to try to
counterbalance the fall in C, I, G, or X so that the unemployment does not result.
The tools the government would use are 1) Increasing G, or 2) lowering taxes (on households)
and thus increasing C, or 3) some combination of the two.
Expansionary Fiscal Policy
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