Chapter 30: Fiscal Policy, Deficits, And Debt

Front 1

What is a Fiscal Policy?

Back 1

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply. Defined as discretionary meaning "active"

Front 2

What is the Council of Economic Advisors?

Back 2

a group of three economists appointed by the president to provide expertise and assistance on economic matters. Discretionary changes in government spending and taxes are at the option of the Federal government. They do not occur automatically

Front 3

What is non-discretionary mean?

Back 3

Changes that occur without congressional action or ("passive" or "automatic")

Front 4

What is an expansionary fiscal policy?

Back 4

Expansionary fiscal policy is designed to stimulate the economy during or anticipation of a business-cycle contraction. This is accomplished by increasing aggregate expenditures and aggregate demand through an increase in government spending (both government purchases and transfer payments) or a decrease in taxes. Ex: when recession occurs

Front 5

What options does the Federal government have when trying to adopt a fiscal policy that will stimulate the economy?

Back 5

1.) increase government spending

2.) reduce taxes

3.) use some combination of the two

Front 6

What will happen if the Federal budget is balanced?

Back 6

the expansionary fiscal policy will create a government budget deficit-government spending in excess of tax revenues

Front 7

What does aggregate mean?

Back 7

form or group into a class or cluster.

Front 8

What happens with increased government spending?

Back 8

This will shift the economy's aggregate demand curve to the right

Front 9

What does MPC mean?

Back 9

marginal propensity to consumeIn economics, the marginal propensity to consume (MPC) is a metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income (income after taxes and transfers).

Front 10

What happens when the government reduces taxes?

Back 10

the aggregate demand curve shifts rightward

Front 11

What is a contractionary fiscal policy?

Back 11

This is accomplished by decreasing aggregate expenditures and aggregate demand through a decrease in government spending (both government purchases and transfer payments) or an increase in taxes. Contractionary fiscal policy leads to a smaller government budget deficit or a larger budget surplus.

Front 12

What if the government looks to fiscal policy to eliminate the inflationary GDP gap?

Back 12

1) decrease government spending

2) raise taxes

3) use combination of both

Front 13

What is a budget surplus?

Back 13

A budget surplus is a situation in which income exceeds expenditures. The term "budget surplus" is most commonly used to refer to the financial situations of governments; individuals speak of "savings" rather than a "budget surplus." A surplus is considered a sign that government is being run efficiently.

Front 14

What happens with decreased spending in relation to eliminating the inflationary GDP gap?

Back 14

shifts the aggregate demand curve leftward to control demand-pull inflation

Front 15

What is demand-pull inflation?

Back 15

Demand-pull Inflation is asserted to arise when aggregate demand in an economy outpaces aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as "too much money chasing too few goods".

Front 16

When GDP rises, how will any tax yield more tax revenue?

Back 16

Personal income taxes have progressive rates and thus generate more-than-proportionate increases in tax revenues as GDP expands. As GDP rises, and more goods and services are purchased, revenues from corporate income taxes and from sales taxes and excise taxes also increase. Similarly, revenues from payroll taxes rise as economic expansion creates more jobs.

Front 17

What makes transfer payments and tax revenues different?

Back 17

Unemployment compensation payments and welfare payments decrease during economic expansion and increase during economic contraction

Front 18

What is a built-in stabilizer?

Back 18

anything that increases the government's budget deficit (or reduces it's budget surplus) during a recession and increases its budget surplus (or reduces its budget deficit) during an expansion without requiring explicit action by policymakers

Front 19

How are tax rates and revenues related to the level of GDP?

Back 19

Congress decides on a particular level of spending, but it does not determine the magnitude of tax revenues. Instead, it establishes tax rates, and the tax revenues then vary directly with the level of GDP that the economy achieves.

Front 20

What happens to tax revenues and GDP during a time of prosperity?

Back 20

Tax revenues automatically increase as GDP rises, and since taxes reduce household and business spending, they restrain the economic expansion. As the economy moves toward a higher GDP, tax revenues automatically rise and move the budget from deficit to surplus

Front 21

What happens to GDP and tax revenues during a recession?

Back 21

As GDP falls during a recession, tax revenues automatically decline, increasing spending and cushioning the economic contraction. With a falling GDP, tax receipts decline and move the government's budget from surplus toward deficit

Front 22

What is a progressive tax system?

Back 22

the average tax rate (=tax revenue/GDP) rises with GDP. The more progressive the tax system, the greater the economy's built-in stability

Front 23

What is a proportional tax system?

Back 23

the average tax rate remains constant as GDP rises

Front 24

What is a regressive tax system?

Back 24

the average tax rate falls as GDP rises

Front 25

What is a discretionary fiscal policy?

Back 25

changes in tax rates and expenditures

Front 26

What is a monetary policy?

Back 26

central bank- caused changes in interest rates

Front 27

What is the standardized budget?

Back 27

measures what the Federal budget deficit or surplus would have been under existing tax rates and government spending levels if the economy had achieved its full-employment level of GDP (its potential output). Comparing actual government expenditures with the tax revenues that would have occured

Front 28

What is an example to tell if a fiscal policy is neutral?

Back 28

the standardized budget deficit in year 1 is zero- government expenditures equal the tax revenues forthcoming at the full employment output GDP. (Information from graph on page 614)

Front 29

What is an example to tell if the fiscal policy is expansionary?

Back 29

As a percentage of potential GDP, the standardized budget deficit has increased from zero in year 3 (before tax-rate cut) to some positive percent in year 4. This increase in the relative size of the full-employment deficit between two years reveals the new fiscal policy is expansionary. (graph on page 614)

Front 30

What is an example to tell if the fiscal policy is contractionary?

Back 30

If we observed a standardized deficit of zero in one year, followed by a standardized budget surplus the next the fiscal policy changes from being neutral to contractionary. Since the standardized budget adjusts for the automatic changes in tax revenues, the increase in standardized budget surplus reveals the government either decreased its spending or increased tax rates such that tax revenues increased.

Front 31

What is a recognition lag?

Back 31

the time between the beginning of recession or inflation and the certain awareness that it is actually happening. This lag arises because the economy does not move smoothly through the business cycle

Front 32

What is an administrative lag?

Back 32

the wheels of democratic government turn slowly. There will typically be a significant lag between the time the need for fiscal action is recognized and the time the action is taken

Front 33

What is an operational lag?

Back 33

a lag occurs between the time fiscal action is taken and the time that action affects output, employment, or the price level. Although changes in tax rates can be put into effect relatively quickly once new laws are passed, government spending on public works-new dams, interstate highways and so on- requires long planning periods and even longer periods of construction.

Front 34

Why are fiscal policies of state and local governments pro-cynical? (they worsen rather than correct recession or inflation)

Back 34

Unlike the Federal government, they face constitutional or other legal requirements to balance their budgets. During prosperity they increase their expenditures and cut them during recession.

Front 35

What happened with local and state governments during and after the recession?

Back 35

they had to offset lower tax revenues resulting from the reduced personal income and spending of their citizens. They offset the decline in revenues by raising tax rates, imposing new taxes, and reducing spending

Front 36

What is the crowding-out effect?

Back 36

A situation when increased interest rates lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending

Front 37

What is the national or public debt?

Back 37

the total accumulation of the deficits (minus the surpluses) the Federal government has incurred through time. These deficits have emerged mainly through war financing, recessions and fiscal policy

Front 38

What are U.S securities?

Back 38

financial instruments issued by the federal government to borrow money to finance expenditures that exceed tax revenues. The total public debt of 9 trillion represents the total amount of money owed by the Federal government.

Front 39

What are the four types of U.S securities?

Back 39

1.) Treasury bills (short term securities)

2.) Treasury notes (medium-term securities)

3.) Treasury bonds (long-term securities)

4.) U.S saving bonds (long-term, non marketable bonds)

Front 40

Why does the U.S public debt not threaten to bankrupt the Federal government?

Back 40

1.) refinancing

2.) taxation

Front 41

How is the public debt refinanced?

Back 41

the government refinances the debt by selling new bonds and using the proceeds to pay holders of the maturing bonds. The new bonds are in strong demand because lenders can obtain a relatively good interest return with no risk of default by the Federal governement

Front 42

How is can the public debt decrease by taxation?

Back 42

the Federal government has the constitutional authority to levy and collect taxes. A tax increase is a government option for gaining sufficient revenue to pay interest and principle on the public debt

Front 43

What is an external public debt?

Back 43

enables foreigners to buy some of our output. In return for the benefits derived from the borrowed funds, the U.S transfers goods and services to foreign lenders.

Front 44

What will the borrowing and interest payments associated with public debt do?

Back 44

1) increase income inequality

2.) require higher taxes, which may dampen incentives

3.) impede the growth of the nation's stock of capital through crowding out of private investment

Front 45

What is a regressive tax?

Back 45

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

Front 46

What is a progressive tax?

Back 46

a tax that takes a larger percentage from the income of high-income earners than it does from low-income individuals.