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