Fiscal Policy And Debt Flashcards
In what types does the federal budget is split?
Discretionary and mandatory
Discretionary spending
The budget that works its way through the appropriation process of congress each year and includes National defence, transportation, science, environment, education, security
Mandatory spending
Authorised by permanent laws that does not go through the same appropriations process. Includes social security, Medicare, and interest rates on the national debt. To change one of the entitlements of mandatory spending. Congress must change the law
Discretionary fiscal policy
Policies that involve adjusting gov spending and tax policies to push the economy toward full employment by stimulating economic output or loosening inflation
Expansionary fiscal policy
Involves increase in gov spending, increase transfer payments, and/or decrease taxes to increase AD
Contractionary fiscal policy
Policies that decrease AD to contact output in economy. Decrease in gov spending, decrease in transfer payments, and/or increase in taxes to fight inflation
Why do politicians favour expansionary fiscal policy?
They favour it because it can bring increase in employment even at the cost of higher inflation. They tend to steer away from contractionary f p because it results in unemployment
Supply side fiscal policy
Focus on shifting LRAS to the right, expanding the economy without increased inflationary pressures. Unlike policies to increase AD, supply side p take longer to impact the economy. Do not always require tradeoffs between price lvl, output and marginal tax rates
How can expanding long run AS occur?
Can occur through higher investment in infrastructure, research development, human capital, tax incentives for business investment and reducing burdensome regulation. Decrease in the amount of regulations should shift LRAS to the right
Laffer curve
Shows hypothetical relationship between income tax rates and tax revenues. As tax rates increase from 0, revenues rise, reach s maximum, then decline until revenues reach 0 again at 100% tax rates.
What does laffer curve suggest?
It suggests that reducing tax rates could lead to higher revenues if tax rates are high enough
What is the major limitation of fiscal policies to influence LRAS?
Take too long to have an impact compared to policies aimed at influencing AD
Automatic stabilisers
Tax revenues and transfer payments automatically expand or contract in ways that reduce the intensity of business fluctuations without any overt actions by congress or other policymakers. When the economy is booming, tax revenues automatically rise and unemployment compensations and welfare payments fall, loosening the expansion. When the economy enters recession, tax revenues automatically fall and transfer payments rise, cushioning the decline
Information lag
The time it takes to collect, and provide data on the economy
Recognition lag
The time required to recognise trends on the data
Decision lag
The time it takes for congress and the president to decide on the policy
Implementation lag
The time required by congress to pass a law and put it place
In what does these lags may result?
Gov policy results in being mistimed
Public choice theory
Economic analysis of public and political decision making, looking at issues such as voting, election incentives on politicians, and the influence of special interest groups. Public choice economists argue that deficit spending reduces the perceived cost of current gov operations, and therefore politicians willing to enact expansionary policies that lead to deficit and a higher public debt.
Deficit
Amount by which annual gov expenditures exceed tax revenues
Surplus
Amount by which annual tax revenues exceed gov expenditures
National debt
Total накопления accumulations of past deficit less surpluses. Measured by the total amount of public debt issued by the u.s treasury
Public debt
The portion of the national debt that is held by the public, including individuals, companies, and pension funds, along with foreign entities and foreign government. Referred to as net debt held by the public
Annually balanced budget
Expenditures and tax revenues would have to be equal each year
Cyclically balanced budget
Balancing the budget over the course of the business cycle by restricting spending or raising taxes when the economy is booming and using these surpluses to offset the deficits that occur during recessions
Functional finance
An approach that focuses on fostering economic growth and stable prices while keeping the economy as close as possible to full employment
What are the approaches to finance the federal gov
Annually balancing budget, balancing the budget over the business cycle, and ignoring the budget deficit and focusing on promoting full employment and stable prices
Government budget constraint
The fed gov’ s debt must be financing by selling bonds to the fed reserve (printing money, monetirising the debt), by selling bonds to the public, or by selling gov assets
Internally held debt
Public debt owned by domestic banks, corporations, mutual funds, pension plans, and individuals
Externally held debt
Public debt held by the foreigners
Crowding out effect
When deficit spending requires the gov to borrow, interest rates are given up, reducing consumer spending and business investment
Fiscal sustainability
A measure of the present value of all projected future revenues compared to the present value of projected future expanding
8% of the federal budget accounts for
Interest payments on the debt account for 8% of the federal budget
The public debt is consisted of
60% is held by the public is held by domestic individuals and institutions. 40% is held by foreigners
Why do foreign gov purchases US debt?
To keep their currencies from rising relative to the u.s dollar
