Macroeconomics Chapter 13: Fiscal Policy (Final)

Lump-sum taxes

A tax that is the same for everyone, regardless if any actions people take

Cyclically adjusted budget balance

An estimate of what the budget balance would be if real GDP were exactly equal to potential output

Fiscal year

Changes in government spending and taxes designed to affect overall spending

Which policies constitute expansionary fiscal policy and which constitute contractionary fiscal policy?

Expansionary fiscal policy is implemented by an increase in government spending, a cut in taxes, or an increase in government transfers. Contractionary fiscal policy is implemented by a reduction in government spending, an increase in taxes, or a reduction in government transfers Government purchases of goods and services directly affect aggregate demand, and changes in taxes and government transfers affect aggregate demand indirectly by changing households' disposable income. Expansionary fiscal policy shifts the aggregate demand curve rightward; contractionary fiscal policy shifts the aggregate demand curve leftward

Why does fiscal policy have a multiplier effect and how does how is this effect influenced by automatic stabilizers?

Fiscal policy has a multiplier effect on the economy, the size of which depends on the fiscal policy. Except in the case of lump-sum taxes, taxes reduce the size of the multiplier. Expansionary fiscal policy leads to an increase in real GDP, and contractionary fiscal policy leads to a reduction in real GDP. Because part of any change in taxes or transfers is absorbed by savings in the first round of spending, changes in government purchases of goods and services have a more powerful effect

Expansionary fiscal policy

Fiscal policy that increases aggregate demand by increasing government purchases, decreasing taxes, or increasing transfers

Discretionary fiscal policy

Fiscal policy that is the direct result of deliberate actions by policy makers rather than automatic adjustments or rules

Debt-GDP ratio

Government debt as a percentage of GDP, frequently used as a measure of a government's ability to pay debts

Public debt

Government debt held by individuals and institutions outside the government

Social insurance

Government programs - like social Social Security, Medicare, unemployment insurance, and food stamps - intended to protect families against economic hardship

Automatic stabilizers

Government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands without requiring any deliberate actions by policy makers. Taxes depend on disposable income are the most important example of automatic stabilizers

Implicit liabilities

Spending promises made by governments that are effectively a debt despite the fact that they are not included in the usual debt statistics. In the United States, the largest implicit liabilities arise from /Social Security and Medicare, which promise transfer payments to current and future retirees (Social Security) and to the elderly (Medicare)

Why can a large public debt and implicit liabilities of the government be a cause for concern?

The United States government budget accounting is calculated on the basis of fiscal years. Persistently large budget deficits have long-run consequences because they lead to an increase of public debt. As a result, two potential dangers may arise: Crowing out, which reduces long-term economic growth, and financial pressure leading to default, which brings economic and financial turmoil

What is fiscal policy and why is it an essential tool in managing economic fluctuations? Why do governments calculate the cyclically adjusted budget balance?

The government plays a large role in the economy, collecting a large share of GDP in taxes and spending a large share both to purchase goods and services and to make transfer payments, largely for social insurance. Fiscal policy is the use of taxes, government transfers, or government purchases of goods and services to shift the aggregate demand curve. Some of the fluctuations in the budget balance are due to the effects of the business cycle. In order to separate the effects of the business cycle from the effects of discretionary fiscal policy, governments estimate the cyclically adjusted budget balance, an estimate of the budget balance if the economy were at potential output