Fiscal policy

Fiscal Policy

Changes in government purchases and/or taxes designed to achieve full employment and low inflation.

• sometimes called discretionary fiscal policy or activist fiscal policy

Multiplier effect

The concept that an additional dollar of expenditures will result in the creation of more than one dollars worth of real GDP

Business cycle

The short term fluctuations experienced in the economy due to changes in levels of economic activity

Recession

A decline in real output for at least two consecutive quarters

Expansion

A phase of the business cycle characterized by increasing real GDP, income, and employment

Full-employment real GDP

The level of real GDP produced in an economy when it is operating at the natural rate of unempoyment.

• the level of real GDP when the economy is in a long run equilibrium

Expansionary fiscal policy

The application of fiscal policy to increase aggregate demand; involves increasing government purchases and/or decreasing taxes

• used in recessions to help economy recover more quickly

Multiplier effect

The concept that an additional dollar of expenditures will result in the creation of more than one dollar’s worth of real GDP

Disposable income formula

Disposable income = income - taxes

DI= Y - T

Contractionary fiscal policy

The application of Fiscal policy to decrease aggregate demand

• involves decreasing government purchases and/or increasing taxes

• used during rising inflation to lower inflation

expenditres multiplier

The effect that a $1 change in expenditure has on real GDP; calculated as the ratio of the total change in real GDP due to a change in initial expenditure

Marginal propensity to consume (MPC)

The fraction of each additional dollar of income that is spent on consumption

Marginal propensity to save (MPS)

The fraction of each additional dollar of income that is saved

(Change in savings / Change in income)

Cost-push inflation

Inflation that occurs due to a decrease in aggregate supply

Demand-pull inflation

Inflation that occurs due to an increase in aggregate demand

Automatic stabilizer

A feature of existing government policy that automatically steadies the economy by decreasing government spending and/or increasing taxes as an economy grows or by increasing govenrment spending and/or reducing taxes when an economy contractes

• recession, tax rates fall

• inflation tax rates increase
  

Transfer payment

A payment made by the government that does not require an exchange of economic activity in return

Progressive tax

A tax in ae tax rate increases as taxable income increase

Recognition lag

The time between when an event affects an economy and when we recognize that effect in the data collected

Legislative lag

The time it takes for policy makers to pass legislation authorizing a new fiscal policy

implementation lag

The time between when a policy is enacted and when it has its full effect on the economy

Loanable funds

money that is available in an economy for the private sector and government to borrow

Crowding out

The process by which an increase in government borrowing results in les borrowing by businesses and consumers for private investment

Interest rate

The payment made to agents that lend or save money, expressed as an annual percentage of the monetary amount lent or saved

• nominal interest rate or price of money