Chapter 16

large

A (large/small) tax wedge distorts the incentives of individuals and firms to take part in economic activities, generally resulting in lower levels of economic activity— lower real GDP

Crowding Out

A decline in private expenditures as a result of an increase in government purchases

70%

About __% of the debt is owned by Americans. So interest payments on the debt largely are transfers from one group of Americans to another

Potential GDP, recession

Although many economists believe the federal budget should be balanced when the economy is at _________ ___, few believe it should be balanced during a __________

increase

An increase in aggregate demand will not only result in real GDP rising. It will also result in a price level (increase/decrease), because the short-run aggregate supply curve is upward-sloping.

67%

Before the Great Depression of the 1930s, most government spending was at the state or local level; now the federal government's share is __%

Government Purchases Multiplier

Change in equilibrium real GDP/ change in government purchases

Tax Multiplier

Change in equilibrium real GDP/ change in taxes

Fiscal Policy

Changes in federal taxes and purchases that are intended to achieve macroeconomic policy goals

indirectly

Decreasing taxes (indirectly/directly) affects aggregate demand by increasing disposable income, and hence consumption spending

supply-side economics

Fiscal policy actions intended to have long-run effects by expanding the productive capacity of the economy and increasing rate of economic growth - primarily affect aggregate supply

automatic stabilizers

Government spending and taxes that automatically increase or decrease along with the business cycle

contractionary

If the government believes real GDP will be above potential GDP, it can enact (expansionary/contractionary) fiscal policy in an attempt to restore long-run equilibrium— decreasing inflation

expansionary

If the government believes real GDP will be below potential GDP, it can enact (expansionary/contractionary) fiscal policy in an attempt to restore long-run equilibrium— decreasing unemployment

autonomous

If the government increases its spending on goods and services, then aggregate demand increases immediately. This is the __________ increase in aggregate demand.

increases

Increasing government purchases directly (increases/decreases) aggregate demand.

Individual Income Tax

Tax that affects labor supply decisions and the returns to entrepreneurship

Corporate Income Tax

Tax that affects the incentives of firms to engage in investment

Tax on dividends and capital gains

Tax that affects the supply of loanable funds from households to firms, and hence the real interest rate, Also affects the way firms disburse profits

Cyclically adjusted budget deficit or surplus

The deficit or surplus in the federal government's budget if the economy were at potential GDP

tax wedge

The difference between the pretax and post-tax return to an economy activity

income, payroll

The majority of federal revenues come from taxes on individual employment: individual ______ taxes and "_______ taxes" earmarked to fund Social Security and Medicare

Multiplier Effect

The series of induced increases in consumption spending that results from an initial increase in autonomous expenditures

Budget Deficit

The situation in which the government's expenditures are greater than it's tax revenue

Budget Surplus

The situation in which the government's expenditures are less than it's tax revenue

negative

The tax multiplier will be a (positive/negative) number: an increase in taxes will decrease equilibrium real GDP

National Debt

The total value of treasury securities that the federal government sells while in a budget deficit

fall

Transfer payments (fall/rise) when GDP rises: unemployment compensation and welfare payments are lower when the economy does well, higher when the economy does poorly

smaller

We expect the tax multiplier to be (larger/smaller) (in absolute value) than the government purchases multiplier

pre-tax wage

When a firm decides how many people to employ, it considers how much it has to pay in total for each worker

after-tax wage

When an individual decides how much to work, he bases the decision on how much an hour of work will increase his ability to consume goods and services

Congressional Budget Office

a non-partisan organization that estimates the effects of government policies

G

consists of defense spending and "everything else", like salaries of FBI agents, operating national parks, and funding scientific research

transfer payments

half of federal expenditures are spent on ________ ________, like Social Security, Medicare, and unemployment insurance

Tax reform

has the potential to significantly increase real GDP in the long run beyond the increases that would otherwise occur

Discretionary Fiscal Policy

intentional actions the government takes to change spending or taxes so as to achieve macroeconomic objectives

Contractionary Fiscal Policy

involves decreasing government purchases or increasing taxes

Expansionary Fiscal Policy

involves increasing government purchases or decreasing taxes

induced

people receive increased spending as increased income and increase their consumption spending accordingly. This is the _______ increase in aggregate demand