Automatic Stabilizers- Macro Topic 3.9 - Hey, how you doing econ students? This is Mr. Clifford. It's time to learn a key concept, you're going to see it all the time. It's called fiscal policy. It's actually super duper easy. [FORMULA ON SCREEN: "GDP = AD = C + I + G + Xn"] Fiscal policy is laws made by a legislative branch to effect spending and taxes. So that's it. Two things that do it, it's spending, government spending, and taxes. There's two basic fiscal policies. There's discretionary and non-discretionary fiscal policy. Non-discretionary fiscal policy are the automatic stabilizers, are the laws we have in our books that automatically speed up or slow down the economy without making a new law. For example, we have unemployment benefits, and other things out there that when the recession hits and the economy is actually falling, then we end up paying more of these things, the government is spending more of these things on helping people and increasing the GDP. And it's automatically done. No new law. Another one is our tax system, right? If people are doing real rich, the economy's doing real well, well, that increases people's taxes, because the richer you are, you pay more taxes in our progressive income tax system. Now, discretionary fiscal policy is new laws made by Congress to increase or decrease spending or taxes. That's it. Two things. Spending and taxes. So let's start off with spending. Let's assume we're in a really bad recession and the goal of the government is to get us out of it. Right? Would you want to increase or decrease government spending? You want to increase it, right? Increase government spending, that would increase aggregate spending and that would increase our GDP. If we had inflation, or the economy is going too fast, in theory they would decrease government spending and slow down the economy. We talk about taxes. We'll talk about taxes on individuals. So tax cuts or increasing taxes. If we're in a really bad recession, the economy's doing horrible, and the government wants to get us out of it, another option they can do is decrease taxes. When you decrease taxes, that would increase consumption, because people would have more disposable income. They'd not be paying the government, and so they have more money to go buy other things. That would increase aggregate spending, and that would get us out of the recession. If we had a problem with inflation, the economy's overheating, then the government could actually increase taxes. Increasing taxes would decrease people's disposable income, and that would affect consumption by decreasing it, decreasing aggregate demand. OK? Fiscal policy, two things, spending, taxes. Until next time.