Introduction to Macroeconomics Econ 104
Worksheet 5 – Fiscal Policy, Money and the Federal Reserve Bank
1. In fiscal policy, what are automatic stabilizers? Give two examples.
Automatic stabilizers are a sort of built-in non-discretionary economic safety net that takes effect in
specific economic situations. They ensure that citizens who do not have sufficient means to sustain
themselves in a recession are able to continue living in a comfortable manner, which in turn gets the
economy back on track more quickly. A couple of examples are unemployment insurance and
progressive income taxes.
2. What is discretionary fiscal policy? Give two examples of recent discretionary policies that
have been implemented during the current economic crisis of the last three years.
Discretionary fiscal policy is a set of policy choices associated with a certain problem, involving
spending and taxation. For example, one fiscal policy is to increase spending and/or cut taxes in a
recession, or to decrease spending or increase taxes when and economy is overheated.
3. Taxes play a large role in fiscal policy. How do economist’s differentiate/analyze the different
types of taxes? (Hint: three of them, progressive….)
• A Proportional (flat) Tax is a policy where all people pay the same percent of their income.
This policy is the one currently in place in the state of Massachusetts.
• A Progressive Tax is a policy where higher income people pay a higher percent of their income
than lower income people. This is the tax policy being employed for collecting federal income
• A Regressive Tax is a policy where higher income people pay a lower percent of their income
than lower incom