Paul Krugman Macroeconomics Ch 13
contractionary fiscal policy
fiscal policy that reduces aggregate demand through - reduction in government spending - increase in taxes - reduction in government transfer
3 arguments against expansionary fiscal policy:
1. Gov't spending crowds out private spending 2. Gov't borrowing crowds out private investment spending 3. Gov't budget deficits lead to reduced private spending
Discretionary fiscal policy
fiscal policy that is the result of deliberate actions by policy makers rather than rules
Expansionary policy only works during a (inflationary/recessionary) gap
Recessionary gap
Transfer payments tend to (rise/fall) when the economy is contracting.
Rise
Budget Balance S = T-G-TR
S = gov't savings T = tax revenues G = gov't purchases TR = value of gov't transfers
Largest implicit liabilities in US gov't come from:
Social security, Medicare, and Medicaid
cyclically adjusted budget balance
an estimate of what the budget balance would be if real GDP were exactly equal to potential output
An increase in taxes or reduction in government transfers (increases/decreases) disposable income
decreases
expansionary fiscal policy
fiscal policy that increases aggregate demand through - increase in government spending - cut in taxes - increase in government transfers
automatic stabilizers
gov't spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands.
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
debt-GDP ratio
the gov't's debt as a percentage of the GDP