Macroeconomics Chapter 17 - Government Budgets and Fiscal Policy

Unit 2 for Exam 2 (Unit 5 in reality). Outlines government spending; taxation; federal deficeits and the national debt; using fiscal policy to fight recession, unemployment, and inflation; automatic stabilizers; practical problems qith discretionary fiscal policy; the question of a balanced budget.

Budget deficit

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

Budget surplus

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

Balanced budget

When the government spending and taxes are equal

Major federal spending categories (~60%)

National defense, social security, health programs, and interest payments

Government debt

Accumulated overtime and is the sum of all past deficits and surpluses

How is the deficit not debt?

Deficit or surplus refers to the budget each year

Individual income tax

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

Payroll tax

A tax based on the pay received from employers

What programs does payroll tax fund?

Social security and Medicare

Progressive tax

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

What is the US choice of income tax?

Progressive tax

Marginal tax rate

The tax rate an individual would pay on one additional dollar of income; the tax percentage on the last dollar earned. Currently ranged from 10% to 35%

Proportional tax (Flat tax)

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

Regressive tax

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

Corporate Income tax

A tax imposed on corporate profits

Excise tax

A tax on a specific good, like gasoline, tobacco, & alcohol

Estate and gift tax

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

How do local and state governments get revnue?

• Sales tax

• Property tax

• Funding from Federal Gov

• Personal and corporate income tax

• A variety of fees and charges

National debt

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

Expansionary fiscal policy

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

Contractionary fiscal policy

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

Discretionary fiscal policy

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

Automatic stabilizers

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