Economics Chapter 10 Government Spending

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Legislation intended to establish a balanced budget was the

Gramm-Rudman-Hollings Bill.

Federal government spending increased dramatically starting when?

Great Depression because the federal government took a larger role in everyday economic affairs, and because Franklin D. Roosevelt's New Deal

Government helath expenditures include a joint federal-state insurance program

Medicaid

jointly funded (federal and state) medical insurance program for low-income people

Medicaid

federal health-care program for senior citizens, regardless of income

Medicare

The office that prepares the president's annual budget proposal, reviews the budget and programs of the executive departments

Office of Management and Budget (OMB)

Which act was created in an attempt to trim $500 billion from the deficit over a five year period?

Omnibus Budget Reconciliation Act

Which of the following statements best describes the relationship of the federal deficit to the national debt?

The federal deficit leads to borrowing, which adds to the national debt.

annual budget in which expenditures equal revenues

balance budget

constitutional amendment requiring government to spend no more than it collects in taxes and other revenues, excluding borrowing many States have this, but the Federal government does NOT

balance budget amendment

Public sector spending

both directly and indirectly affects how resources are allocated

a negative balance after expenditures are subtracted from revenues

budget deficit

a positive balance after expenditures are subtracted from revenues

budget surplus

spending for federal programs that must receive annual authorization-1/3 of the federal budget Examples: national defense, OSHA, military, welfare

discretionary spending

way in which the nation's income is divided among families, individuals, or other designated groups

distribution of income

The more government borrows today, the more

future generations will have to repay.

Example of government spending competing with the private sector

government hospitals for the military or veterans compete with private hospitals -public schools compete with private school

A type of transfer payment from one level of government to another that does not involve compensation

grant-in-aid

Since the 1930s, spending by all levels of government as a percentage of GPD

has increased

Example of national debt crowding out

if the government run a deficit and tries to raise funds by selling bonds, it will cause the interest rate paid by private borrowers to go up

The largest category of state spending is

intergovernmental expenditures

funds that one level of government transfers to another level for spending

intergovernmental expenditures

What are top areas where State Government spends money?

intergovernmental expenditures (collect sales tax and allocate to local cities or counties) public welfare (Medicaid) insurance trust and retirement (money for retired state employees) higher education (state colleges and universities) highways hospitals interest on public debt

If the government achieves a balanced budget, what happens to the federal debt?

it stays the same

All levels of government combined consume about

one third of the nation output

transfer payment

payment for which the government receives neither goods nor services in return; There's 2 types: 1. grant-in aid: includes social security, welfare, unemployment compensation, and disability payments 2. subsidies

per person basis; total divided by population

per capita

a line-item budge expenditure that circumvents normal budget procedures and benefits a small number of people or businesses

pork project

The sequence for the approval of the federal budget is

president to Congress and back to president

that part of the economy made up of private individuals and businesses

private sector

requirement that new spending proposals or tax cuts must be offset by reductions elsewhere

"pay-as-you-go" provision

3 things the government could do if if there was a a surplus

1-pay off the national debt 2-spend it 3-save it

Differences between public and private debt

1. US citizens owe most of the national debt to ourselves where private debt is owed to others 2. national debt is repaid when government bonds are cashed in where private repayment is on a specific date 3. US purchasing power is not lost with national debt where private sector loses purchasing power when it borrows

Legislative measures to reduce deficits and national debt

1. balanced budget amendment 2. pay-as-you- go provisions 3. line-item veto to president 4. spending caps

discretionary spending

programs that must receive annual authorization. about 1/3 of federal budget

that part of the economy made up of local, state, and federal governments -did not begin to rise significantly until the 1940's

public sector

three ways the government spending impacts the economy (direct impact)

resource allocation distribution of income competing w private sector

mandatory spending

spending authorized by law that continues without the need of annual approvals of Congress; for example, interest payments on the federal debt. Makes up about 2/3 of federal budget

limits on annual DISCRETIONARY spending

spending cap

Example of national debt reducing economic incentives

spending money carelessly decrease desire and passion to work hard to earn more money to pay more taxes that are wasted

government payment to encourage or protect a certain economic activity

subsidy

2 transfer payments

subsidy grant-in-aids

Transfer payments from the government to individuals might be used to

support Social Security

Example of national debt redistributing income (distribution of income)

taxing the rich and giving the money to the poor in welfare payments

public sector

that part of the economy made up of local, state, and federal governments

private sector

that part of the economy made up of private individuals and businesses

What role does the Office of Management and Budget (OMB) play in establishing the federal budget?

the OMB assembles the budget under presidental guidelines

Social Security is an example of a

transfer payment

payment for which the government receives neither goods nor service in return government simply receives the tax revenue and passes it on to individuals (welfare) or States (grant-in-aid)

transfer payment

grant-in-aid

transfer payment from one level of government to another that does not involve compensation (ex. interstate highway construction, public schools)

special account used to hold revenues designated for a specific expenditure such as Social Security, Medicare, or highways

trust fund

Example of government spending affecting resource allocation

when government decides it needs more war machines, resources are used to make these instead of appliances for homes

Example of government spending affecting redistribution of income

when government decides to increase transfer payments (money to elderly or poor), the elderly and poor income increases when the government decides to decrease transfer payments, the elderly and poor's income decreases

Example of government spending increase the tax burden

when government spends more, people need to pay more in taxes

federal budget deficit

when the budget has shown expenditures to be larger than revenues

Steps in establishing the federal budget

1. budget is developed by the executive branch (president) 2. budget is then sent to the House of Representatives and they can approve it, modify, or disapprove it. They break the budget into 13 categories and assigns them to house subcommittees 3. house subcommittees prepares appropriation bills 4. House of Appropriations Committee votes on each bill 5. approved bills are sent to entire House of Representatives 6. Once approved, it is sent to the Senate. they can approve it or draft their own version 7. Congress approved budget is sent to President to sign or veto

The government spends its revenue on

1. goods and services, and 2. transfer payments

Ways to reduce deficits and national debt

1. legislative 2. raise revenue (taxes) 3. reduce spending

how can the federal debt affect the economy

1. transfers purchasing power from the private to the public sector 2. reduces incentives to work 3. crowds out private borrowers(crowding out) 4. distribution of income

It is difficult to predict deficits because

1. unexpected things happen (wars, natural disasters) 2. economy strength (strong economy means more taxes are paid; weak economy means less taxes)

when did the federal debt explode?

1980's

When was the last surplus in the federal budget?

1998

the first federal budget surplus during the past 45 years occured in

1998

since when has the balanced budget amendment been in place for CA

2004

nonpartisan congressional agency evaluates the impact of legislation and projects future revenues and expenditures that will result from legislation

Congressional Budget Office (CBO)

when does the fiscal year for the federal government start and finish?

Dec 1st to Sep 30th of the next year

part of the executive branch responsible for preparing federal budget under the presidents guidelines

President's Office of Management and Budget (OMB)

What are top areas where Federal Government spends money?

Social Security National Defense Income Security Medicare Health (Medicaid and OSHA) Interest on National Debt

States usually fund part of the expenses for

State colleges and universities Students pay the rest in tuition

In what way is the national debt different from private debt?

The national debt does not have to be repaid by a specific date

Who formulates the federal budgest?

The president

The two broad categories of government spending are

The purchase of goods and services (tanks, planes, office buildings etc) and transfer payments (social security, welfare, unemployment etc.)

grant-in-aids - examples

These are types of transfer payments: -interstate highways -construction programs -construction of new public school

fiscal year

a 12 month financial planning period that may or may not coincide with the calendar year

The federal government establishes

a budget and allocates funds accordingly.

Which of the following was the main feature of the Budget Enforcement Act of 1990?

a pay-as-you-go provision

appropriations bill

an act of Congress that allows federal agencies to spend money for specific purposes

federal budget

an annual plan outlining proposed revenues and expenditures

federal budget surplus

an excess of revenues over expenditures of $117.3 billion

Which of the following normally decreases the federal deficit?

an increase in taxes

Which of the following would be considered a grand-in-aid?

an interstate highway construction program

legislation authorizing spending for certain purposes

appropriations bill

higher than normal interest rates that heavy government borrowing causes

crowding-out effect

spending in excess of revenues collected

deficit spending

The national debt has increased dramatically because of

deficit spending.

Congress has tried a number of measures to reduce

deficits and the national debt. None have been successful

Local governments spend money mainly on

education (elementary and secondary) utilities, and public safety(fire and police) roads parks and recreation library

Of the following four categories, which accounts for the largest amount of local expenditures?

elementary and secondary education

program or benefit using established eligibility requirements to provide health, nutritional, or income supplements to individuals

entitlement

annual plan outlining proposed expenditures and anticipated revenues

federal budget

which of the following is an example of an entitlement payment?

federal money given to a senior citizen as a Social Security payment

total amount borrowed from investors to finance government's deficit spending

federal or national debt

Government policy that attempts to manage the economy by controlling taxing and spending.

fiscal policy

12-month financial planning period that may not coincide with the calendar year

fiscal year

power to cancel specific budget items without rejecting the entire budget -supreme court said it was unconstitutional

line-item veto

federal spending authorized by law that continues without the need for annual approvals by Congress-2/3 of federal budget Examples: Social Security, Income Security, Medicare, Medicaid, Interest on National Debt

mandatory spending

Budget deficits add to

national debt

Example of national debt transferring purchasing power

national debt increases taxes and when taxes increase, people have less money to spend on themselves national debt increases taxes in future generations, so the future generations have less money to spend on themselves

An ecxample of discretionary spending is financing for

national defense

Which of the following is an example of discretionary spending?

national defense


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