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