Chapter 15 - Fiscal Policy

Coupon payments

Payments of a small percentage of the face value of a security.

Federal Reserve

The Central Bank of the United States, known as the Fed.

Face value

The amount of money to be repaid to the holder of a security; also called the par value.

Expansionary fiscal policy

Any combination of government spending and tax cuts meant to spur the economy.

Contractionary fiscal policy

Any combination of government spending cuts and tax increases meant to slow the economy down.

Treasury bond

A security issued by the U.S. Treasury that pays interest in the form of coupon payments and matures in 30 years.

Supply-side policy

Aims to stimulate the economy by increasing aggregate supply.

Mandatory spending vs. Discretionary spending

------ Mandatory Spending that is required by law. Ex - Medicaid, Social Security ------ Discretionary Government spending that is not required by existing law; rather, it is authorized annually by Congress and the president. Ex - repair streets

Budget surplus vs. Budget deficit

------ Surplus government revenues exceed government payments. ------ Deficit government payments exceed government revenues

Automatic stabilizer vs. Discretionary fiscal policy vs.Mandatory spending

------- Automatic stabilizer Changes in taxation and transfer payments that moderate changes in GDP and do not require authorization from the government ------- Discretionary fiscal policy Taxation and government spending that comes about as a result of new laws ------ Mandatory spending Spending that is required by law

Outside lag vs. Recognition lag vs. Implementation lag

------- Outside lag The time between a policy action and the resulting effect on the economy. ------- Recognition lag The time it takes economists and government officials to realize that the economy is experiencing a problem. ------- Implementation lag The time between the recognition of a problem and the decision about what to do about it.

Treasury bills (T-bills) vs. Treasury notes (T-notes) vs. Treasury bonds (T-bonds)

------- Treasury bills (T-bills) a. its price is determined at auction b. its face value (amount to be repaid) is one year or less c. always sold at discount price; less than the amount to be repaid ------- Treasury notes (T-notes) a. its price is determined at auction b. coupon payments (payments of a small percentage of the face value of their securities) are an incentive to purchase c. its price may be greater than its face value d. its face value is 2-10 years ------- Treasury bonds (T-bonds) a. a. its price is determined at auction b. coupon payments (payments of a small percentage of the face value of their securities) are an incentive to purchase c. its price may be greater than its face value d. its face value is over 10 years

1. Income tax revenues decline during a recession because workers earn less income. 2. Congress votes to expand the interstate highway system. 3. Tax rates for small businesses are lowered. 4. Congress decides to increase personal income taxes to slow down inflation. 6. Congress votes to change the age at which individuals can receive Social Security benefits. 7. The federal government decides to extend unemployment benefits during a prolonged recession.

1. Automatic stabilizer 2. Discretionary fiscal policy 3. Discretionary fiscal policy 4. Discretionary fiscal policy 5. Mandatory spending 6. Discretionary fiscal policy 7. Discretionary fiscal policy

1. Defense spending to fund a war increases, but tax rates are not increased 2. A recession begins, and demands for assistance from the federal government escalate 3. Consumer spending falls, and workers are laid off 4. A prolonged period of peacetime economic prosperity significantly increases the incomes of all Americans 5. A series of national disasters plagues the United States, and demands for federal assistance increase

1. Deficit 2. Deficit 3. Deficit 4. Surplus 5. Deficit

Balanced budget

A budget designed to equate expected revenues with planned expenditures.

Inside lag

A delay between the onset of a problem and the implementation of a solution.

Government security

A document that represents government's promise to repay a certain amount of money over time.

Federal budget

A plan for how the federal government will spend money over the coming fiscal year.

Treasury bill

A security issued by the U.S. Treasury that matures in 4, 13, 26, or 52 weeks

Treasury note

A security issued by the U.S. Treasury that pays interest in the form of coupon payments and matures in 2, 3, 5, or 10 years.

Demand-side policy

Designed to help the economy by increasing or decreasing aggregate demand.

Means-tested

Eligibility for these programs depends on the prospective recipients' income.

Disposable income

Income after taxes have been removed.

1. Explain the purpose of expansionary fiscal policy.

It increased spending or tax cuts. They provide consumers and businesses with more money to spend.

Macroeconomic equilibrium

Occurs when aggregate supply equals aggregate demand

Transfer payments

Payments for which the government receives no goods or services in return.

Dividends

Payments made out of a corporation's profits to owners of its stock.

Entitlement programs

Programs that people are entitled to by law if they meet certain qualifications.

Appropriation bills

Separate spending bills that are part of the budgeting process.

Deficit spending

Spending in excess of revenues.

National debt

The amount of money that the federal government has borrowed over time to fund annual budget deficits and has not yet repaid.

Crowding-out effect

The constraint on private sector borrowing that results from higher interest rates due to government borrowing

Debt limit

The highest amount that the national debt can reach as authorized by Congress.

Public debt

The money owed to investors by the federal government.

Intragovernmental debt

The money the federal government owes to government programs such as Social Security and Medicare.

Servicing the debt

The payment of interest on the national debt.

Monetizing the debt

The practice of having the Federal Reserve create new money to purchase securities.

Classical economics

The school of economic thought dominant from the 1700s to the 1930s that favors laissez-faire policies with minimal government intervention.

Keynesian economics

The school of economic thought named after British economist John Maynard Keynes that advocates fiscal policy to mend problems with the economy.

Fiscal policy

The use of government spending and taxation to pursue economic growth, full employment, and price stability.

Treasury Inflation-Protected Securities

U.S. Treasury securities that protect investors against inflation because the amount to be repaid rises with inflation.

2. Explain the purpose of contractionary fiscal policy

the government either cuts spending or raises taxes. the way it contracts the economy. It reduces the amount of money available for businesses and consumers to spend.

Fiscal year

the period of time over which the federal government budget applies; begins on October 1 and ends on September 30