(a) Discretionary fiscal policy is different from non-discretionary fiscal policy in the sense that it requires congress to shift aggregate demand by decreasing taxes or through government spending. A) the existence of the progressive federal income tax. Dornbusch. D) an interest rate cut implemented to stimulate consumption. The Keynesian school argues that fiscal policy can have powerful effects on AD, output and employment when an economy is operating below full capacity national output; Keynesians believe that a government should make active use of fiscal policy measures to fine-tune aggregate demand particularly when monetary policy is proving ineffective. Fiscal policy is budget policy, it’s how the government adjusts government spending and revenue to meet economic objectives. The former is chosen by Congress while the latter is chosen by the President c. The former is always stabilizing, while the latter is never stabilizing. The following article will update you about the difference between discretionary and automatic fiscal policy. An area of interest is whether prices are increasing at the same rate for goods and services that could be considered essential (non-discretionary), compared to goods and services that are more discretionary in nature. Please sign in or register to post comments. In this video I explain the basics of fiscal policy and the difference between non-discretionary and discretionary fiscal policy. All rights reserved. (5) The automatic stabilizers embedded in the fiscal system have experienced little net change since the 1960s and have contributed to cushioning cyclical fluctuations. Discretionary fiscal policy is so named because... State true or false and justify your answer:... State true or false and justify your answer: The... Automatic Stabilizers in Economics: Definition & Examples, How Currency Changes Affect Imports and Exports, The Importance of Timing in Fiscal and Monetary Policy Decisions, Crowding Out in Economics: Definition & Effects, How Fiscal and Monetary Policies Affect the Exchange Rate, Tax Multiplier Effect: Definition & Formula, Gross Domestic Product: Items Excluded from National Production, Supply and Demand Curves in the Classical Model and Keynesian Model, How the Reserve Ratio Affects the Money Supply, Fiscal Policy Tools: Government Spending and Taxes, The Money Market: Money Supply and Money Demand Curves, Required Reserve Ratio: Definition & Formula, What is an Economic Model? topic of discretionary vs nondiscretionary characteristic of fiscal stabilisers (SF). It could be taxes or spending. The mistiming problem with discretionary fiscal policy results from: A. a delay in recognizing a recession. Due to an increase in taxes, households have less disposal income to spend. When changes are made, it’s done to expand the economy. If you were to use an Aggregate Supply Aggregate Demand diagr am to model nondiscretionary and discretionary fiscal policy in reaction to a positive aggregate demand shock, you would see 16. Keywords: sustainability, fiscal policy, automatic fiscal stabilizers, discretionary versus nondiscretionary, principle of the minimal action JEL classification: E62, E63, H3 Administrative lag arises from the time it takes to enact the needed statutes. Non discretionary fiscal policy is an automatic change in the government level of expenditure and taxes. Managerial Economics (103) … University of Delhi. Nondiscretionary fiscal policy Answer: D Due to automatic stabilizers, when income rises, government transfer spending: A. B. A discretionary account is an account that gives an investment adviser the authority to make individual trades without the consent of their client. Distinguish between discretionary and nondiscretionary fiscal policy. Fiscal policy is a way by which a government adjusts the tax rates and government spending levels to manage the economic fluctuations. Certain measures, such as varying the expenditure programs and tax rates, may have temporary stabilizing effects. Fiscal policy is a way by which a government adjusts the tax rates and government spending levels to manage the economic fluctuations. "A discretionary fiscal policy is a monetary policy that is created and initiated by a government entity as a means of dealing with events and trends that are t… Nondiscretionary fiscal policy, for example, includes government policies that stimulate the economy when it needs stimulus and dampen it when it needs to be dampened. Course. non-discretionary fiscal mechanism, respectively that mechanism indirectly causative generated and realised by formal implicit actions of design, implementation (functioning) and monitoring of fiscal policy or fiscal instruments. Expert Answer 100% (1 rating) Discretionary fiscal policy is the deliberately manipulatedfiscal policy by the government to achieve its economic goals and objectives. The tax cuts of 2001 and 2003 that came in the form of tax rebate checks are good examples of _____ fiscal policy It will be done by lowering the fed funds rate or through quantitative easing. They are usually rarely changed. It is also used widely by economists and the general community to assess the health of the Australian economy. The higher the income a person has, the higher the percentage that person pays in tax. The group that often initiates changes in fiscal policy is the: Council of Economic Advisors. C) a tax cut adopted to stimulate consumption. 2017/2018. Expansionary policy is used more often than its opposite, contractionary fiscal policy. Become a Study.com member to unlock this On the other hand, discretionary fiscal policy includes new laws that are designed to balance the economy. B) a federal jobs program adopted to stimulate consumption. An example of nondiscretionary fiscal policy would be The existence of the progressive federal income tax If you were to use an aggregate supply aggregate demand diagram to model nondiscretionary and discretionary fiscal policy in reaction to a negative aggregate demand shock, you would see the aggregate demand curve move Non Discretionary Accounts. Which is most effective at combating unemployment? Thanks. What is an example of govt transfer payments. It is nondiscretionary fiscal policy that mitigates business cycles by increasing aggregate demand during recessions and decreasing aggregate demand during expansions. Contractionary fiscal policy is a form of fiscal policy that involves increasing taxes, decreasing government expenditures or both in order to fight inflationary pressures. Automatic stabilizers are a type of fiscal policy, which is favored by Keynesian economics as a tool to combat economic slumps and recessions. Chap011 - Dornbusch. In practice, most policy actions are discretionary in nature. This possibility may be relevant for understanding the impact of fiscal policy in the 1990s, although the mechanism is unclear. Sign in Register; Hide. This is known as a ‘built in stabiliser' which helps fight recession and inflation. – Discretionary fiscal policy … JEL Classification: E00, E60. The tax cuts of 2001 and 2003 that came in the form of tax rebate checks are good examples of _____ fiscal policy In macroeconomics, discretionary policy is an economic policy based on the ad hoc judgment of policymakers as opposed to policy set by predetermined rules. Conversely, contractionary fiscal policy might have a salutary effect on output. the former often takes years to enact, while the latter takes effect automatically. The Federal Reserve created many other tools to fight the Great Recession. Which is most compatable with a "free" market? They include social security, welfare and unemployment compensation. 12. In general, it takes anywhere from six to twelve months after implementing policy changes to experience major improvements. This spending is an optional part of fiscal policy, in contrast to social programs for which funding is mandatory and determined by the number of eligible recipients. Discretionary fiscal policy refers to changes in:... 1.Discretionary fiscal policy works to close a... What is the income net of taxes called? Services, Discretionary Fiscal Policy: Definition & Examples, Working Scholars® Bringing Tuition-Free College to the Community. See more. A nondiscretionary change is when it occurs without the congressional action, so it happens automatically. The government might be trying to rev up the economy or achieve a surplus. 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