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