ECON 1113-002 Chapter 13

fiscal policy

changes in government spending and tax collections designed to achieve full employment, price stability, and economic growth; also called discretionary fiscal policy

council of economic advisors (CEA)

a group of three persons that advises and assists the president of the United States on economic matters (including the preparation of the annual Economic Report of the President)

expansionary fiscal policy

an increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output

budget deficit

the amount by which expenditures exceed revenues in any year

contractionary fiscal policy

a decrease in government purchases of goods and services, an increase in net taxes, or some combination of the two, for the purpose of decreasing aggregate demand and thus controlling inflation

budget surplus

the amount by which the revenues of the federal government exceed its expenditures in any year

built-in stabilizer

a mechanism that increases government’s budget deficit (or reduces its surplus) during a recession and increases government’s budget surplus (or reduces its deficit) during an expansion without any action by policymakers. the tax system is one such mechanism

progressive tax

at the individual level, a tax whose average tax rate increases as the taxpayer’s income increases. at the national level, a tax for which the average tax rate (= tax revenue/GDP) rises with GDP

proportional tax

at the individual level, a tax whose average tax rate remains constant as the taxpayer’s income increases or decreases. at the national level, a tax for which the average tax rate (= tax revenue/GDP) remains constant as GDP rises or falls

regressive tax

at the individual level, a tax whose average tax rate decreases as the taxpayer’s income increases. at the national level, a tax for which the average tax rate (= tax revenue/GDP) falls as GDP rises

cyclically adjusted budget

the estimated annual budget deficit or surplus that would occur under existing tax rates and government spending levels if the economy were to operate at its full-employment level of GDP for a year; the full-employment budget deficit or surplus

cyclical deficit

federal budget deficit that is caused by a recession and the consequent decline in tax revenues

recognition lag

the time between the beginning of recession or inflation and the certain awareness that it is actually happening. arises because the economy does not move smoothly through the business cycle

administrative lag 

the time between when policymakers recognize the need for a fiscal action and when that fiscal action is actually taken 

operational lag

delay between the time fiscal action is ordered and the time that it actually begins to affect output, employment, or price level. tax changes have short of these lags because they can be lowered instantly with immediate impacts, but government spending requires long planning periods and construction (highways, dams, etc)

political business cycles

fluctuations in the economy caused by the alleged tendency of Congress to destabilize the economy by reducing taxes and increasing government expenditures before elections and to raise taxes and lower expenditures after elections

crowding-out effect

a rise in interest rates and a resulting decrease in planned investment caused by the federal government’s increased borrowing to finance budget deficits and refinance debt

public debt

the total amount owed by the federal government to the owners of government securities; equal to the sum of past government budget deficits less government budget surpluses

U.S government securities

U.S. Treasury bills (short-term), notes (medium-term), and bonds (long-term) used to finance budget deficits; the components of the public debt

issues of public debt

income distribution, incentives, external public debt, and crowding-out effect

public investments

government expenditures on public capital (such as roads, highways, bridges, mass-transit systems, and electric power facilities) and on human capital (such as education, training, and health)