• Unit 4: Fiscal Policy

    Fiscal policy describes the government's spending and taxing decisions. The economic objective of government is to maximize social well-being while operating within a budget. The government's role in the economy is complex, and economic models attempt to account for the far-reaching effects of policy decisions. Simple one-period or static models lay the foundation for analyzing short-term effects of taxing and spending decisions. Dynamic multi-period models are then constructed to better explain the ripple effects of government policies.

    Every government faces the choice to either raise revenue through taxes or borrow funds by issuing bonds. There is no one correct decision, and tradeoffs must be considered. A well-thought-out policy will incorporate external factors like the current business cycle, international developments, and demographic changes. For example, increased taxation tends to slow economic activity yet limits the amount of debt. Aside from economic considerations, optimal tax and borrowing policies must factor in the political process. A final policy is a compromise among many stakeholders, and good fiscal policy analysis is framed by political forces.

    Completing this unit should take you approximately 17 hours.

    • 4.1: Static Models of Spending and Taxation

    • 4.2: Dynamic Models of Spending and Taxation

    • 4.3: Taxes vs. Borrowing

    • Unit 4 Assessment