Test 3: ch 9 (fiscal policy) Flashcards
Automatic/built-in stabilizers
Are automatic changes in the government’s budget are often referred to as built-in, or automatic, stabilizers because they change automatically as economic conditions change and they counteract the business cycle.
Fiscal policy
Fiscal policy is the government’s powers of spending and taxation. Fiscal policy is used to change the government’s budget to pursue the three main goals of macroeconomics.
Three main macroeconomic goals for most economies
full employment, price stability, and economic growth.
Change in government’s budget
which is comprised of two parts: government expenditures (G) and net taxes (T).
Net taxes
Net taxes are equal to total tax revenue minus transfer payments made by the government.
Budget deficit
exists when the government expenditures exceed net taxes (G>T).
Budget surplus
exists when net taxes exceed government expenditures (G
Balanced budget
A balanced budget exists when government expenditures equal net taxes (G=T).
changes in AD via government spending
A reduction in government spending decreases aggregate demand.
An increase in government spending results in an increase of aggregate demand.
(G and AD have a direct relationship.)
changes in AD via tax changes
An increase in taxes causes a decrease in aggregate demand.
A decrease in taxes results in an increase in aggregate demand.
(T and AD have an inverse relationship)
Autonomous expenditures (spending) multiplier
The multiplier effect suggests that any change in aggregate autonomous expenditure will change income and real GDP by some multiple of the initial change in spending. The formula can be used to perform fiscal policy analysis when a change in government spending is being considered as well as predict the impact of a change in taxes on the economy’s equilibrium level of income and output.
Formula: 1/(1-MPC)= 1/MPS = chg Y/ chg I = chg Y/ chg G
Tax multiplier
Tax multiplier can be used to calculate changes in real GDP (y) that results from tax changes.
Formula: -MPC/MPS or = 1-autonomous spending multiplier
Balanced budget multiplier
In this three-sector Keynesian model, the balanced budget multiplier is always equal to one, regardless of the values of the MPC and MPS.
Discretionary fiscal policy
Changes in government spending and taxation designed to achieve specific macroeconomic goals.
Adding government (C+I+G): Equilibrium
Assumptions:
1) investment spending and government spending are autonomous: independent of the level of current income.
2) SRAS curve is horizontal: Taxes are lump-sum taxes - paid one time.
Supply-side fiscal policy
implies that the policies are designed to stimulate output or aggregate supply.
Changes in marginal tax rates
is the rate applied to additional personal and business income.
Laffer curve
The curve shows that tax revenue increases as the tax rate increases, it hits a maximum, T, and then begins to decrease beyond some relatively high rate, such as t.
Federal government sources and uses of revenue
IDK
Cyclical deficit
Even if Congress passes a balanced budget, downturns in economic activity (business cycle/recession) can trigger automatic increases in government spending and a decrease in tax revenue, resulting in a cyclical deficit.
Structural deficit
If Congress approves a budget for which spending is grater than projected tax revenue, then there is already a structural deficit.
- A deficit that exists even at full employment. meaning you are spending more than you can get in (taxes). “cant grows big enough to pay the deficit off”.
National (public) debt
- The liabilities of the United States Government. It’s the total stock of outstanding government securities (bonds)
- Its originates in the budget deficit
- US government bonds are held by US citizens, private institutions and government agencies.
