macro exam 3

transfer payments

part of government spending

payments made to groups or individuals when no good or service is received in return

govt transfers funds from one group in country to another

ex: income assistance, social security payments to retired/disabled people

constitute a large and growing share of federal outlays

types of outlays

mandatory outlays, discretionary outlays, interest payments

mandatory outlays

largest portion of federal budget consisting of ongoing federal programs like social security and Medicare

mandatory bc existing laws mandate government funding for them

not usually altered and aka entitlement programs

discretionary outlays

outlays subject to adjustment during annual budget process

ex: monies for bridges, roads, to pay gov workers, or defense spending

less than 1/3 of US gov budget

interest payment

payments made to current owners of US treasury bonds, also mandatory

taxes

how the government funds services and projects

sources of tax revenue

1. individual income 

2. social insurance (SS and medicare)

3. corporate income

4. other

individual income and social insurance taxes are both from paychecks and make up about 83% of revenue

taxes on workers wages

social insurance tax and income tax

social insurance tax

$ used for social security and medicare

about 15.3% of worker’s pay (usually half paid by employer)

income tax

US federal income taxes are set according to a scale that increases with income levels

progressive income tax vs. marginal income tax

progressive income tax

higher incomes pay larger % of income in taxes

marginal tax rates

tax rate paid on individual’s dollar of income. $ above certain amount is taxes @ higher rate than first amount

average tax rate

total tax paid divided by taxable income

usually below marginal tax rate

regressive tax

lower income individuals pay higher % of incomes in taxes

examples include sales tax and excise taxes, same % on the dollar but more burden for lower income

deficits

putting both spending and revenue together

budget deficits

when gov outlays > tax revenues

shortfall in revenue for a particular year’s budget

dif between gov outlay and tax rev is the deficit

balance is negative here

budget surplus

gov spending < tax revenue

tax revenue exceeds outlays

balance is positive

debt

total of all accumulated and unpaid budget deficits

debt vs deficit example

ex: borrow 500 each year for college for four years

deficit = 500 per year

debt = 2000

2 types of government policy

monetary policy and fiscal policy

monetary policy

use of money supply to influence the economy

fiscal policy

use of government spending and taxes to influence the economy

can be used to slow rapid growth or stimulate the economy

can affect budget deficits and debt

multiplier process: way in which effects of fiscal policy ripple through the economy 

expansionary fiscal policy

government increases spending/decreases taxes to stimulate the economy toward expansion