Chapter 15: Fiscal Policy

Budget deficit

A budget in which government expenditures exceed government revenues in a given time period.

Budget surplus

A budget in which the government revenues exceed government expenditures in a given time period.

Supply-side fiscal policy

A fiscal policy that emphasizes government policies that increase aggregate supply in order to achieve long-run growth in real output, full employment, and a lower price level.

Laffer curve

A graph depicting the relationship between tax rates and total tax revenues.

Automatic stabilizers

Federal expenditures and tax revenues that automatically change levels in order to stabilize an economic expansion or contraction; sometimes referred to as non-discretionary fiscal policy.

Spending multiplier (SM)

The change in aggregate demand (total spending) resulting from an initial change in any component of aggregate demand, including consumption, investment, government spending, and net exports. As a formula, the spending multiplier equals 1/(1-MPC).

Tax multiplier (TM)

The change in aggregate demand (total spending) resulting from an initial change in taxes. As a formula, the tax multiplier equals 1 - spending multiplier.

Marginal propensity to consume (MPC)

The change in consumption spending resulting from a given change in income.

Discretionary fiscal policy

The deliberate use of changes in government spending or taxes to aler aggregate demand and stabilize the economy.

Fiscal Policy

The use of government spending and taxes to influence the nation's output, employment, and price level.