Government Budgets and Fiscal Policy

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

if government spending and taxes are equal

taxation

Three categories: Federal; State and Local

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; the taxes provide funds for Social Security and Medicare

corporate income tax

a tax imposed on corporate profits

excise tax

a tax on a specific good – on 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

progressive tax

a tax that collects a greater share of income from those with high incomes than from those with lower incomes. Example: income tax

proportional tax

a tax that is a flat percentage of income earned, regardless of level of income. Example: Medicare

regressive tax

a tax in which people with higher incomes pay a smaller share of their income in tax. Example: Social Security payroll tax, sales tax

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 AD, either through increases in government spending or cuts in taxes

contractionary fiscal policy

fiscal policy that decreases the level of AD, either through cuts in government spending or increases in taxes

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 restraining aggregate demand when the economy speeds up, without any additional change in legislation.

• Federal fiscal policies include discretionary fiscal policy, when the government passes a new law that explicitly changes tax or spending levels.

  • Example: 2009 stimulus package.

• Changes in tax and spending levels also can occur automatically, due to automatic stabilizers, such as unemployment insurance and food stamps, which are programs that are already laws that stimulate AD in a recession and hold down AD in a potentially inflationary boom.

standardized employment budget

what the budget deficit or surplus would be if the economy were producing at potential GDP, where people who look for work were finding jobs in a reasonable period of time and businesses were making normal profits, with the result that both workers and businesses would be earning more and paying more taxes

crowding out

federal spending and borrowing causes interest rates to rise and business investment to fall

recognition lag

the time it takes to determine that a recession has occurred

legislative lag

the time it takes to get a fiscal policy bill passed

implementation lag

the time it takes for the funds related to fiscal policy to be dispersed to the appropriate agencies to implement the programs

d

What percentage of 2014 federal spending went to Medicare/Medicaid?
a) 10%
b) 19%
c) 24%
d) 33%

d

A tax system where all incomes pay the same rate is:
a) Regressive
b) Progressive
c) Proportional
d) Excise

c

3. The 2009 stimulus package is an example of:
   a) Automatic stabilizer
   b) Contractionary policy
   c) Discretionary fiscal policy
   d) Monetary policy

b

Which component is NOT part of mandatory federal spending?
a) Social Security
b) National defense
c) Medicare
d) Interest payments

d

When GDP grows faster than debt, the debt-to-GDP ratio:
a) Increases
b) Remains stable
c) Decreases
d) Fluctuates randomly

c

6. "Crowding out" occurs when government borrowing raises:
   a) Unemployment
   b) Inflation
   c) Interest rates
   d) Tax revenues

c

Which best describes U.S. federal taxes 1960–2014?
a) Averaged 25% of GDP
b) Primarily came from corporate taxes
c) Relied on income/payroll taxes
d) Were mostly regressive

c

A key problem with discretionary fiscal policy is:
a) It works too quickly
b) Implementation time lags
c) It requires voter approval
d) It only affects states

c

During recessions, automatic stabilizers cause:
a) Higher taxes and lower spending
b) Lower taxes and higher spending
c) Balanced budgets
d) Defense spending cuts

a

The standardized employment budget removes the impact of:
a) Interest rate changes
b) Inflation
c) Automatic stabilizers
d) Foreign trade