Chapter 17/18 PP

examples of expansionary fiscal policy

-Higher (government) spending -Tax cuts -Increase in government transfers

An increase of 1% in the budget deficit will lead to a rise in interest rates of between

.5-1%

In 2014, the federal debt was ___% of the GDP

74

Regressive tax

A tax for which the percentage of income paid in taxes decreases as income increases

Progressive tax

A tax for which the percentage of income paid in taxes increases as income increases

Proportional tax

A tax in which the average tax rate is the same at all income levels.

American Recovery and Reinvestment Act

An economic stimulus bill passed in 2009, in response to the Great Recession, that provided $787 billion to state and local governments for schools, hospitals, and transportation projects. It was one of the largest single packages of government spending in American history.

The difference between what a government spends and what it collects in taxes in a given period:

Budget deficit= G-T

planned aggregate expenditure

C+I+G

Discretionary fiscal policy

Changes in taxes or spending that are the result of deliberate changes in government policy.

Excise tax

Consumer tax on a specific kind of merchandise, such as tobacco.

"Fool in the Shower"

Friedman: the scenario when central banks or governments overreact to swings in the economic cycle and loosen monetary and fiscal policies too far and too fast, without waiting to gauge the impact of their initial actions.

In GDP=C+I+G+X-M, the government directly controls __ and indirectly affects __ and __

G C, I

Gramm-Rudman-Hollings Act

Passed by the U.S. Congress and signed by President Reagan in 1986, this law set out to reduce the federal deficit by $36 billion per year, with a deficit of zero slated for 1991.

In a healthy, growing economy, aggregate supply and demand should shift ______ every year

Right. Equilibrium goes up and to the right every year

corporate income tax

The tax a corporation pays on its profits

Recognition lag

The time it takes for policy makers to recognize the existence of a boom or a slump.

Federal Surplus

When the government collects more in taxes than it spends

Equilibrium Output

Y (AE)=C+I+G

In equilibrium

Y=C+S+T AE=C+I+G Y=AE C+S+T=C+I+G S+T=I+G

examples of contractionary fiscal policy

a reduction in government purchases of goods and services, an increase in taxes, and a reduction in government transfers

Individual income tax

a tax based on a person's earnings

lump-sum tax

a tax that is the same amount for every person

In practice, it takes about ________ for a change in taxes or in government spending to have its full effect on the economy.

a year

Marginal tax rate

amount of tax payable on the next dollar earned

Because of ______ the actual budget deficit or surplus will vary with the size of the GDP

automatic stabilizers

Deficits at full employment (structural deficits)

can have negative long-run consequences.

automatic stabilizers

changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action

Higher interest rate is one economic mechanism by which government borrowing can

crowd out private investment.

Deficit targeting requires

cuts in spending or increases in taxes at times when the economy is already experiencing problems

Time lags

delays in the economy's response to stabilization policies

In a recession, taxes _____, transfer payments ______, and the deficit ______

fall, rise, grows

expansionary fiscal policy

fiscal policy that increases aggregate demand through increased government spending or decreased taxes

Stabilization policy

government economic policy intended to smooth out fluctuations in output and unemployment and to stabilize prices

social insurance programs

government programs (transfer payments) intended to protect families against economic hardship

Government deficit

government spends more money than takes in taxes

In a healthy, growing economy if aggregate demand does not smoothly shift to the right and match increases in aggregate supply, _________ can develop

growth with deflation

disposable income

income (after taxes) that is available to you for saving or spending Y-T

Automatic Stabilizer examples

income taxes and transfer payments

A government trying to stimulate the economy through tax cuts or spending increases will

increase the government deficit

Extremely high levels of aggregate demand will generate

inflationary increases in the price level

Contractionary fiscal policy shifts the aggregate demand curve to the

left And moves equilibrium left and down along the supply curve

estate and gift taxes

levied on the fair market values of wealth transfers upon death or by gift

In a healthy, growing economy, rhe economy produces at potential GDP with ______________ in the price level.

only a small inflationary increase

Government transfers

payments that the government makes to individuals without expecting a good or service in return

A higher interest rate tends to discourage firms from making

physical capital investments

contractionary fiscal policy

reduces aggregate demand through decreased government spending or increased taxes

An expansionary fiscal policy intended to shift aggregate demand to the _____ can also lead to a higher interest rate, which has the effect of shifting aggregate demand back to the _____.

right, left

In the financial market, an increase in government borrowing can shift the demand curve for financial capital to the

right. Increases interest rates

Actual budget consists of

structural deficit and cyclical deficit

response lags for monetary policy

take about 2 years

Payroll tax

tax on wages and salaries to finance Social Security and Medicare costs

Net taxes

taxes paid by firms and households to the government minus transfer payments made to households by the government

Deficits in recessions (cyclical deficits) are

temporary and do not impose any long-run problems.

Federal budget

the budget of the federal government

Cyclical deficit

the deficit that occurs because of a downturn in the business cycle

Structural deficit

the deficit that remains at full employment

Fiscal policy is the manipulation of items in

the federal budget

government spending multiplier

the ratio of the change in the equilibrium level of output to a change in government spending

Debt

the sum total of accumulated budget deficits

Ricardian Equivalence

the theory that rational private households might shift their saving to offset government saving or borrowing

Action/Implementation Lag

the time it takes for the funds relating to fiscal policy to be dispersed to the appropriate agencies to implement the programs.

Legislative lag

the time it takes to get a fiscal policy bill passed

Implementation lag

the time it takes to put the desired policy into effect once economists and policy makers recognize that the economy is in a boom or a slump (getting passed through congress, etc)

Response lag

the time that it takes for the economy to adjust to the new conditions after a new policy is implemented; the lag that occurs because of the operation of the economy itself

Fiscal policy

the use of taxes, government transfers, or government purchases of goods and services to shift the aggregate demand curve

Structural deficits occur when

there is a deficit in the full employment budget as well as the actual budget

Attempts to stabilize the economy can prove destabilizing because of

time lags

When a government borrows money in the financial capital market, it causes a shift in the demand for financial

to the right

Expansionary fiscal policy will shift the aggregate demand curve

to the right. It will also move the equilibrium to the right along this curve

Full employment/standardized employment budget

what the federal budget would be if the economy were producing at the full-employment level of output

Crowding out

where government borrowing and spending results in higher interest rates, which reduces business investment and household consumption