Chapter 13: Unemployment and fiscal policy Flashcards
Drivers of private investment spending within the capitalist economy
Expectations about future post-tax profits.
Marginal propensity to consume
The change in consumption when disposable income changes by one unit.
Aggregate demand equation
Aggregate demand = consumption + investment
How government spending and tax can dampen the economy
- Size of government: Larger the government the generally more stable the government.
- Government provides unemployment benefits: Smooths out fluctuations in income
- Government intervention: Use fiscal policy to stabilise aggregate demand.
Government budget surplus
When the government budget balance is positive. See also: Government budget balance.
Budget in balance: G = T
Budget deficit: G > T
Budget surplus: G < T
Austerity policy
A policy where a government tries to improve its budgetary position in a recession by increasing its saving. See also: Paradox of thrift.
Primary budget deficit meaning
The government deficit (its revenue minus its expenditure) excluding interest payments on its debt. See also: Government debt.
Multiplier mechanism
The total (direct and indirect) change in output caused by an initial change in government spending.
Aggregate consumption
An equation that shows how consumption spending in the economy as a whole depends on other variables: for example, in the multiplier model, the other variables are current disposable income and autonomous consumption. See also: Disposable income, Autonomous consumption.
Investment function
An equation that shows how investment spending in the economy as a whole depends on other variables, namely, the interest rate and profit expectations. See also: Interest rate, Profit.
Goods market equilibrium
The point at which output equals the aggregate demand for goods produced in the home economy. The economy will continue producing at this output level unless something changes spending behaviour. See also: Aggregate demand.
Autonomous consumption
Consumption that is independent of income.
Autonomous demand
Components of aggregate demand that are independent of current income.
Target wealth
Target wealth is the level of wealth that the household aims to hold, based on its economic goals (or preferences) and expectations. We assume that households try to maintain this level of wealth in the face of changes in their economic situation, as long as it is possible to do so.
Household balance sheet
A record of the assets, liabilities and net worth of an economic actor such as a household, bank, firm or government.
Financial accelerator
The mechanism through which firms’ and households’ ability to borrow increases when the value of the collateral they have pledged to the lender (often a bank) goes up.
Automatic stabilisers
Characteristics of the tax and transfer system in an economy that have the effect of offsetting an expansion or contraction of the economy.
Fiscal stimulus
The use by the government of fiscal policy (via a combination of tax cuts and spending increases) with the intention of increasing aggregate demand. See also: Fiscal multiplier, Aggregate demand.
Paradox of thrift
The paradox is that if a single individual consumes less, her savings will increase; but if everyone consumes less, the result may be lower rather than higher savings overall. The attempt to increase saving is thwarted if an increase in the saving rate is unmatched by an increase in investment (or other source of aggregate demand such as government spending on goods and services). The outcome is a reduction in aggregate demand and lower output so that actual levels of saving do not increase.
Government budget balance
The excess of government purchases of goods and services plus interest payments and transfers including pensions over tax and other forms of revenue. See also: Government budget deficit, Government budget surplus.
Government budget deficit
When the government budget balance is negative. See also: Government budget balance.
Government budget surplus
When the government budget balance is positive. See also: Government budget balance.
Government debt
Thesum of all the bonds the government has sold over the years to finance its deficits, minus the ones that have matured.
Supply side (aggregate economy)
How labour and capital are used to produce goods and services. It uses the labour market model (also referred to as the wage curve and profit curve model). See also: Demand side (aggregate economy).