The Government && Fiscal Policy
Planned Aggregate Expenditure
AE ≡ C + I + G
Federal Surplus (+) or Deficit (−)
Federal *government receipts minus expenditures.*
Saving/Investment Approach to Equilibrium
Saving/investment approach to equilibrium in an economy with a government: S + T = I + G Equilibrium in an economy with a government: Y = C + I + G
Monetary Policy
The *behavior of the Federal Reserve concerning the nation's money supply.*
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.*
Budget Deficit & Budget Deficit Formula
The *difference between what a government spends and what it collects in taxes* in a given period. ***Budget Deficit ≡ G − T***
Fiscal Drag
The *negative effect on the economy that occurs when average tax rates increase because taxpayers have moved into higher income brackets during an expansion.*
Privately Held Federal Debt
The *privately held* (non-government-owned) *debt of the U.S. government.*
Tax Multiplier & Tax Multiplier Formula
The *ratio of change in the equilibrium level of output to a change in taxes.* ***Tax multiplier ≡ -(MPC/MPS)***
Government Spending Multiplier & Government Spending Multiplier Formula
The *ratio of the change in the equilibrium level of output to a change in government spending.* ***Government spending multiplier ≡ 1/MPS***
Federal Debt
The *total amount owed by the federal government.*
Fiscal Policy
The government's *spending & taxing policies.*
Balanced-Budget Multiplier & Balanced-Budget Multiplier Formula
The ratio of change in the equilibrium level of output to a change in government spending where the change in *government spending is balanced by a change in taxes so as not to create any deficit.* The balanced-budget multiplier is equal to 1. ***Balanced-budget multiplier ≡ 1***
Full-Employment Budget
What the *federal budget would be if the economy were producing at the full-employment level of output.*
Discretionary Fiscal Policy
*Changes in taxes or spending* that are the *result of deliberate changes in government policy.*
Automatic Stabilizers
*Revenue and expenditure items in the federal budget that *automatically* change with the state of the economy in such a way as to *stabilize* GDP.*
Automatic Destabilizer
*Revenue and expenditure items in the federal budget that automatically change with the state of the economy in such a way as to *destabilize* GDP.*
Net Taxes
*Taxes paid by firms and households to the government minus transfer payments made to housholds by the government.*
Disposable or After-Tax Income
*Total income minus net taxes*: Yd ≡ Y − T Y = Total Income T = Net Taxes