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