Principles of Macroeconomics: Fiscal Policy

Comprehensive vocabulary flashcards covering the components of the federal budget, tax wedge effects, the Laffer curve, generational accounting, and fiscal stimulus mechanisms.

Federal budget

An annual statement of the outlays (payments made) and receipts (payments received) of the government of the United States, together with the laws and regulations that approve and support them.

Fiscal policy

The use of the federal budget to pursue macroeconomic objectives, such as full employment, decided jointly by the president and the Congress.

Receipts

Payments received by the government, which come primarily from taxes.

Outlays

The items the government spends money on, consisting of transfer payments, expenditure on goods and services, and debt interest.

Budget balance

The difference between government receipts and government outlays: $\text{Budget balance} = \text{Receipts} - \text{Outlays}$.

Budget surplus

A condition in which government receipts exceed outlays, resulting in a budget balance greater than zero ($\text{Budget balance} > 0$).

Budget deficit

A condition in which government outlays exceed receipts, resulting in a budget balance less than zero ($\text{Budget balance} < 0$) and requiring the government to borrow.

Government debt

The total cumulative amount of money that the government has borrowed over its history.

Before-tax wage

The wage rate that employers pay to workers.

After-tax wage

The net wage rate that workers actually take home after income tax is deducted.

Tax wedge

The gap between the wage paid by employers and the wage received by workers: $\text{Tax wedge} = [\text{Before-tax wage}] - [\text{After-tax wage}]$.

Laffer curve

A graph shaped like an upside-down "U" that illustrates the relationship between the tax rate on the x-axis and the amount of tax revenue collected on the y-axis.

Social Security

Government transfer payments made to retirement-age individuals.

Medicare

Government payments for healthcare expenses during retirement.

Generational accounting

An accounting system that measures the lifetime tax burden and lifetime benefits of each generation.

Fiscal imbalance

The difference between the present value of future benefits the government plans to pay to retirees and the present value of future taxes it expects to collect from workers: $\text{Fiscal imbalance} = \text{Present value of benefits} - \text{Present value of taxes}$.

Fiscal stimulus

The use of fiscal policy to increase production and employment during a recession by increasing direct expenditure, increasing transfer payments, or decreasing taxes.

Automatic fiscal policy

A fiscal policy action triggered by the state of the economy that does not require any explicit government action, such as tax receipts automatically decreasing during a recession.

Needs-tested spending

A form of automatic fiscal policy in which government spending automatically rises during a recession because more individuals become unemployed or low-income and qualify for benefits such as unemployment compensation, food stamps, and Medicaid.

Discretionary fiscal policy

A fiscal policy action deliberately initiated by an act of Congress, such as approving an increase in government expenditure on goods and services.