Gov Budgets and Fiscal Policy Flashcards
What is a budget deficit, surplus, and a balanced budget?
Deficit - Gov spends more than it earns from taxes
Surplus - Gov earns more from taxes than it spends
Balanced - spending and tax revenue are equal
What percentage of overall GDP is Gov spending?
Roughly 20%
What does the Gov do when it runs a deficit to balance the budget?
It sells treasury bonds to the public and foreign countries to cover the difference.
In other words, it is borrowing the money with the promise to repay with interest in the future.
What is the difference between a deficit and debt?
A deficit is the an annual loss
Debt is the total accumulation of annual losses
75% of the overall Gov spending is within 4 sectors, what are they, and what percentage do they account for?
Healthcare - 25%
Social Security - 25%
National Defense - 20%
Net Interest on Debt - 5%
When the Gov runs a budget surplus, what happens with the surplus?
It is used to pay down national debt or refunded to taxpayers
What percentage of overall GDP is accounted by state spending?
Approximately 10%
What are the three main tax revenues for the Gov?
Individual income taxes
Social insurance and retirement receipts (payroll tax)
Corporate taxes
What is the difference between a progressive, regressive, proportional and marginal tax rate?
Progressive - tax rates increase as a households income increases
Regressive - people with higher incomes pay a smaller portion of their income to taxes due to income tax caps
Proportional - flat percentage of all wages up to the cap amount
Marginal - tax paid on all annual income based on income brackets
What is an excise tax?
A tax on a particular good
What has happened to the Debt/GDP ratio over the last 20 years, and what happened to the budget after 2008 financial crisis?
It has increased substantially. In 2000 the debt was roughly 40% of GDP. In 2015 the debt had doubled to 80% of GDP.
The financial crisis of 2008 created a very large disparity between tax revenue and Gov spending. Spending went while tax cuts decreased revenue and the Gov ran massive deficits
What happens to AD, SRAS, and LRAS with expansionary and contractionary fiscal policies?
Expansionary policies shift the AD curve outward creating a movement upward along the SRAS curve increasing equilibrium prices and quantities. Eventually LRAS will shift to the right setting a higher production point for GDP.
Contractionary fiscal policies shift the AD curve inward creating a movement down the SRAS curve as equilibrium prices and quantities fall. Eventually LRAS will shift to the left setting a lower production point for GDP.
What happens to the economy with expansionary or contractionary fiscal policies?
The policies either increase or decrease the AD within the economy
What tools does a fiscal policy use to increase AD?
Increasing Gov spending or decreasing taxes and giving consumers/businesses more to spend
What is the main reason for employing contractionary fiscal policy during economic growth?
During an expansionary period AD can surpass the LRAS of an economy causing demand-pull inflation pressure on prices.
At this point a gov will enact fiscal policies to increase taxes or decrease Gov spending to slow down the growth in AD
