CH 12 Flashcards
Counter cyclical fiscal policy & what are the two ways to change?
Government policy in an effort to counter business cycles. 4 Major Problems!
2 Ways:
Increase in Government Purchases
Decrease in Net Taxes
Increase in Government Purchases
Change in GDP= (1/(1-MPC)) x change in G
What is the Tax Multiplier
-MPC/
(1-MPC)
The amount by which Real GDP changes for each $1 change in NT
Decrease in Net Taxes
Change in GDP= (-MPC/ (1-MPC) x Net Taxes
Balanced Budget Multiplier!
Always equal to 1
Happens when the spending and the tax cuts balance each other out and there is NO CHANGE IN GDP
What is the National Debt?
How much the government owes the general public.
Increase national debt by running a budget deficit
Decrease national debt by running a budget surplus
Budget Deficit/ Budget Surplus
Deficit: Government Outlays are greater than tax revenue ( G- T)
Surplus: Tax Revenue is larger than the Government Outlays (T-G)
Business Cycles and The Budget Deficit
What does a recession/expansion mean?
During a recession, Government outlays are greater than tax revenue— Deficit
During expansion, Tax Revenue is greater that Government outlays— Surplus!
Deficit History (as a % of GDP) in 1980’s and 1990’s
Very Large in the 1980’s w/ higher defense spending and large tax cuts under REAGAN
Deficit shrank in the 1990’s under CLINTON, due to longest period of prosperity in USA history and the dot com boom which increased Ip!!
Deficit History (as a % of GDP) in 2000’s
Early 2000 under BUSH it increased again based on defense spending and tax cuts!
Great recession of 2007 caused it to grow even more and then huge spending (OBAMA) to try and stimulate the economy even more
National Debt
Never have to pay it back. were fine as long as debt grows less % than GDP grows.
of 12 trillion on 7 trillion it owes to public, other 5 it owes to other government agencys
