Chapter 11

Standardized budget

A comparison of the government expenditures and tax collections that would occur if the economy operated at full employment throughout the year; the full employment budget

Contractionary Fiscal Policy

A decrease in gov. purchases of goods and services, an increase in net taxes, or a combo to decrease aggregate demand and control inflation

Council of Economic Advisers (CEA)

A group of three economists appointed by the president to provide expertise and assistance on economic matters.

Built-in stabilizer

A mechanism that increases government budget deficit (or reduces its surplus) during a recession and increases its government budget surplus (or reduces its deficit) during an expansion without any action by policy makers (EX: tax system)

What are the differences between proportional, progressive, and regressive tax systems as they relate to an economy's built-in stability?

A progressive tax varies directly with income. A proportional tax stays constant. A regressive tax varies indirectly with income. Tax revenues will rise with GDP under progressive and proportional tax systems and may rise, fall, or stay the same under a regressive tax system. The more progressive the tax system. the greater the built- in stability.

Regressive Tax System

A tax whose average tax rate decreases as the taxpayer's income increases and increases as the taxpayer's income decreases

Progressive tax System

A tax whose average tax rate increases as the taxpayer's income increases and decreases as the taxpayer's income decreases

Proportional Tax System

A tax whose average tax rate remains constant as the taxpayer's income increases or decreases

Expansionary Fiscal Policy

An increase in gov. purchases of goods and services, a decrease in net taxes, or a combo to increase aggregate demand and expand real output

Explain how built-in (or automatic) stabilizers work.

Increases the government budget deficit or reduces its budget surplus during a recession and increases its budget surplus or reduces its budget deficit during an expansion without requiring explicit action by policymakers. This establishes tax rates and the tax revenues then vary directly with the level of GDP that the economy achieves.

Budget deficit

The amount by which the expenditures of the federal government exceed its revenue in any year

Budget surplus

The amount by which the revenues of the federal government exceed its expenditures in any year

Public debt

The total amount owed by the federal government to the owners of the government securities; equal to the sum of past government budget deficits less government budget surpluses

What is the role of the Councilof Economic Advisers (CEA) as it relates to fiscal policy?

To provide expertise and assistance on economic matters to the president.

U.S. Securities

Treasury bills, notes, and bonds used to finance budget deficits; The components of the Public debt

Fiscal Policy

Deliberate changes in government spending and tax collections designed to achieve full employment, control inflation, and encourage economic growth.