Chapter 17 | Government Budgets and Fiscal Policy

Question 1

automatic stabilizers

Answer 1

tax and spending rules that have the effect of slowing down the rate of decrease in aggregate demand when the economy slows down and restraining aggregate demand when the economy speeds up, without any additional change in legislation

Question 2

balanced budget

Answer 2

when government spending and taxes are equal

Question 3

budget deficit

Answer 3

when the federal government spends more money than it receives in taxes in a given year

Question 4

budget surplus

Answer 4

when the government receives more money in taxes than it spends in a year

Question 5

contractionary fiscal policy

Answer 5

fiscal policy that decreases the level of aggregate demand, either through cuts in government spending or increases in taxes

Question 6

corporate income tax

Answer 6

a tax imposed on corporate profits

Question 7

crowding out

Answer 7

federal spending and borrowing causes interest rates to rise and business investment to fall

Question 8

discretionary fiscal policy

Answer 8

the government passes a new law that explicitly changes overall tax or spending levels with the intent of influencing the level or overall economic activity

Question 9

estate and gift tax

Answer 9

a tax on people who pass assets to the next generation—either after death or during life in the form of gifts

Question 10

excise tax

Answer 10

a tax on a specific good—on gasoline, tobacco, and alcohol

Question 11

expansionary fiscal policy

Answer 11

fiscal policy that increases the level of aggregate demand, either through increases in government spending or cuts in taxes

Question 12

implementation lag

Answer 12

the time it takes for the funds relating to fiscal policy to be dispersed to the appropriate agencies to implement the programs

Question 13

individual income tax

Answer 13

a tax based on the income, of all forms, received by individuals

Question 14

legislative lag

Answer 14

the time it takes to get a fiscal policy bill passed

Question 15

marginal tax rates

Answer 15

or the tax that must be paid on all yearly income

Question 16

national debt

Answer 16

the total accumulated amount the government has borrowed, over time, and not yet paid back

Question 17

payroll tax

Answer 17

a tax based on the pay received from employers; the taxes provide funds for Social Security and Medicare

Question 18

progressive tax

Answer 18

a tax that collects a greater share of income from those with high incomes than from those with lower incomes

Question 19

proportional tax

Answer 19

a tax that is a flat percentage of income earned, regardless of level of income

Question 20

recognition lag

Answer 20

the time it takes to determine that a recession has occurred

Question 21

regressive tax

Answer 21

a tax in which people with higher incomes pay a smaller share of their income in tax

Question 22

standardized employment budget

Answer 22

the budget deficit or surplus in any given year adjusted for what it would have been if the economy were producing at potential GDP