CHAPTER 26 - Fiscal Policy Macroeconomics

Hyperinflation

A very rapid rise in the price level; an extremely high rate of inflation. Inflation which exceeds 50% per month.

expansionary fiscal policy

An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output in order to achieve price stability, full employment, and economic growth

Fiscal policy

Changes in federal taxes and purchases that are intended to achieve macroeconomic policy goals - changes done by Congress and President. Changes affect only the national economy

Who carries out fiscal policies?

Congress and President through government purchases and taxes

budget deficit/surplus

Deficit: Government spends more than it collects in revenues. Surplus: Government spends less than it collects in revenues.

Automatic stabilizers

Government spending and taxes that automatically increase or decrease along with the business cycle. example: when the economy is expanding and incomes are rising, the amount the government collects in taxes will increase as people pay additional taxes on their higher incomes.

Which fed. govt expenditure represents payments made by the federal govt to support govt activity at the state and local levels?

Grants to state and local govts. ie: to help reduce crime, grants are given to local police.

When GDP or Actual GDP is greater then LRAS?

Inflationary period

Which federal government expenditure represents payments to holders of the bonds the federal govt has issued to borrow money?

Interest on the national debt

What are causes of hyperinflation?

Price level increases more than 100x's in a year. Excessive growth in the money supply Clear link between qty of M and price levels

The government's three largest transfer programs:

Social Security, Medicare and Medicaid.

What is the long-run effect of a permanent increase in government spending?

The decline in investment, consumption, and net exports exactly offsets the increase in govt spending, therefore real GDP remains unchaged.

discretionary fiscal policy

The government takes actions to change spending or taxes.

What does the govt do to ease budget deficit

They borrow money by issuing treasury bonds.

The largest and fastest-growing category of federal expenditures: ie: social security

Transfer payments

government purchases

When govt spends money and receives something in return, ie: airplanes, services of an FBI agent

crowding out

a decline in private expenditures as a result of an increase in government purchases

Economists refer to the initial increase in government spending as :

autonomous because it is a result of a decision by govt - not as a change in the level of real GDP

When the govt spends more than it takes in

budget deficit

government purchases multiplier

change in equilibrium real GDP / change in government purchases

countercyclical fiscal policy

fiscal policy that seeks to counteract business cycle fluctuations

Government expenditure

include government purchases plus government spending, such as Social Security payments

The goal of expansionary fiscal policy is

increase aggregate demand

The increases in consumption spending that result from the initial autonomous increase in government purchases are:

induced because they are caused by the initial increase in autonomous spending.

Quantity theory presents that the money supply growth rate and _________________________ have a direct relationship

inflation

contractionary fiscal policy

involves decreasing government spending and/or increasing taxes

Economists call the series of induced increases in consumption spending that results from an initial increase in autonomous expenditures the

multiplier effect

The higher the tax rate, the ________ the multiplier effect

smaller

government debt

the accumulation of past budget deficits, minus past budget surpluses

velocity of money

the average number of times each dollar in the money supply is used to purchase goods and services included in GDP

budget balance

the difference between tax revenue and government spending - income minus expenditures

Economists measure government spending relative to:

the size of the economy by calculating government spending as a percentage of GDP.