Discretionary and Automatic Fiscal Policy
Discretionary Fiscal Policy – intentional/discretionary change in government spending or taxation to achieve a desired economic objectives.

  • To close recessionary gap: Use Expansionary Fiscal Policy
    • Government spending - increase in G = AD increases
    • Taxation - decrease in T = AD increases
  • To close expansionary gap: Use Contractionary Fiscal Policy
    • Government spending - decrease in G = AD decreases
    • Taxation - increase in T = AD decreases
An Example would Be a government Stimulus package.
Automatic Fiscal Policy – (a.k.a. automatic stabilizers) set in our economic system to help smooth out business cycles and stabilize our economy.How it works:
(increase in the budget surplus when there is an expansionary gap and increase in the budget deficit when ther is a recessionary gap).
How it will stabilize the economy:(tax system where taxes increase with income)
  • Progressive tax system
    • Expansionary period: Income increases =pushed to higher tax brackets ==> our spending not going up as quickly as our income; it helps to slow down inflation
    • Contractionary period: Income decreases = pushed to lower tax brackets, so that we are not hurt as much by the recession
  • Government assistance to agriculture – subsidies are tied to commodity prices
    • Contractionary period: AD goes down = prices go down = farmers' income goes down = subsidy goes up, the farmer is not hurt as bad as the economy is
    • Expansionary period: AD goes up = prices go up = farmers' income goes up = subsidy goes down, so tht frmer don't get to spend as much and prices doesn't go up too fast.
  • Employment Insurance (EI)
    • during expansionary period: more jobs = more money paid into EI
    • during contractionary period: less jobs = unemployment rate goes up = more people withdraw funds from EI


Stephanie Powers, "ECON 101: Fiscal Policy," (lecture, Red Deer College - Donald School of Business, Red Deer, AB, April 4, 2012).


Dr.Stephanie Powers, "ECON 101: Fiscal Policy," (lecture, Red Deer College - Donald School of Business, Red Deer, AB, April 4, 2012).