Fiscal Policy - Principles of Economics

Automatic Stabilizer

A feature of existing government policy that automatically steadies the economy by decreasing government spending and/or increasing taxes as an economy grows, or by increasing government spending and/or reducing taxes when an economy contracts.

Transfer Payment

A payment made by the government that does not require an exchange of economic activity in return. Transfer payments often take the form of payments to households.

Progressive Tax

A tax in which the average tax rate increases as taxable income increases (and decreases as taxable income decreases).

Fiscal Policy

Changes in government purchases and/or taxes designed to achieve full employment and low inflation. Sometimes called discretionary fiscal policy or activist fiscal policy.

Contractionary Fiscal Policy

The application of fiscal policy to decrease aggregate demand; involves decreasing government purchases and/or increasing taxes.

Expansionary Fiscal Policy

The application of fiscal policy to increase aggregate demand; involves increasing government purchases and/or decreasing taxes.

Multiplier Effect

The concept that an additional dollar of expenditures will result in the creation of more than one dollar's worth of real GDP.

Expenditures Multiplier

The effect that a $1 change in expenditure has on real GDP; calculated as the ratio of the total change in real GDP due to a change in initial expenditure.

Tax Multiplier

The effect that a $1 change in taxes has on real GDP; in the aggregate expenditures model, calculated as the change in output divided by an initial change in taxes.

Implementation Lag

The time between when a policy is enacted and when it has its full effect on the economy.

Recognition Lag

The time between when an event affects an economy and when we recognize that effect in the data collected.

Legislative Lag

The time it takes for policy makers to pass legislation authorizing a new fiscal policy.