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Discretionary Fiscal Policy: Definition & Examples

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  • 0:04 A Glimpse at…
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Lesson Transcript
Instructor: Brianna Whiting
In this lesson, we will learn about discretionary fiscal policy. We will define the term and look at how budget and taxes effect it. The lesson will be concluded with a summary and a quiz.

A Glimpse at Discretionary Fiscal Policy

One evening, you and your spouse were watching the news like you always do. You watched a story on the recent flooding in many parts of the country, and then watched the news report on how the local sports teams did that weekend. Then they got to the world news, and the reporter mentioned something about government spending.

While we have all heard that term before, many of us may not realize what it means when a government spends money. Does the government have a budget? What do they spend money on? Why does a government change their spending? In this lesson, we will learn about discretionary fiscal policy, which will help us to better answer some of these questions.

What does 'discretionary fiscal policy' mean? It refers to actions made by the government. These actions can include things like tax changes and spending. These changes are made from year to year either by Congress or the President. When the government makes changes, it is usually in response to some economic event, such as a recession, and it is done to help expand or contract the economy

Changes to Discretionary Fiscal Policy

Like mentioned earlier, discretionary fiscal policy refers to the changes in the actions of the government each year. Let's take a look at how these changes occur.

The government has a budget, but some portions of that budget change from year to year. This portion of the budget is known as the discretionary budget. Each year, Congress and the President discuss changes to the discretionary budget according to the status of the economy. An example of this is military spending. Obviously, there are numerous situations around the world that need our military's attention, and thus funding these situations is a part of discretionary fiscal policy. In fact, military funding makes up the largest portion of discretionary fiscal policy.

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