Economics Unit 5 (Chapter 12)

Government Purchases

Government spending on new goods and services

*Federal Expenditures

Include transfer payments, goods/services purchases, and interest payments

*State/Local Spending

Focuses on employees (police, teachers)

*Revenue Characteristics

• Revenue comes primarily from taxes and social insurance contributions

• Individual income taxes are the largest federal revenue source

Public Good

A good (or service) provided for all of society; no one is excluded from use of a public good

Quasi-Public Good

A government-provided public good that could be offered in a private market

Transfer Payments

Money from the government for which no direct work is performed in return

Progressive Tax

Percentage increases as income rises (federal income tax)

Proportional Tax

Percentage remains constant (flat tax)

Regressive Tax

Percentage decreases as income rises (sales tax)

Tax Reform (and Tax Reform Act of 1986)

Changes in tax policies and structures

• Tax Reform Act of 1986: Reduced brackets and maximum rates

Tax Base

The particular thing on which a tax is imposed

Tax Abatement

A policy of reducing or eliminating a tax that would normally be charged

Fiscal Policy

Changes in taxes/spending to control unemployment or inflation

Discretionary Fiscal Policy

Deliberate changes in government expenditures and/or taxes to control unemployment or inflation

Automatic Fiscal Policy

Changes in government expenditures and/or taxes that occur automatically as economic activity changes; helps to control unemployment or inflation

Expansionary Policy

Increase spending, decrease taxes

Contractionary Policy

Decrease spending, increase taxes

*Government Purchase Changes

Have greater impact than equal tax changes

Multiplier Effect

Changes in government spending/taxes create larger economic effects

Balanced Budget

Expenditures equal revenues (slightly expansionary)

Surplus Budget

Revenues exceed expenditures (contractionary)

Deficit Budget

Expenditures exceed revenues (expansionary)

Automatic Stabilizers

Push toward deficit during recession; surplus during growth

*Budget Concerns

Include Social Security trust fund and entitlement programs

Entitlement

Programs set up by the government to pay benefits to people who meet the eligibility requirements of the programs

National Debt

Total accumulated federal borrowing from deficit spending

• Financed through treasury bills, notes, and bonds at public auction

Debt Service (Interest)

An ongoing burden

Crowding Out

Government borrowing can increase interest rates, reducing private borrowing

U.S. Treasury Securities

Issued by the federal government in return for funds lent to it