market failure
a problem that causes the market economy to deliver an outcome that does not maximize efficiency
redistribution
the shifting of resources from some groups in society to other
price mechanism
changing the price of a good to encourage or discourage use
public provision
the government provides the good directly
public financing of private provision
the government pays and companies produce
political economy
the theory of how the political process produces decisions that affect individuals and the economy
centralization
the extent to which spending is concentrated at higher (federal) levels or lower (state and local) levels
budget surplus
when revenues exceed spendings
budget deficit
when revenues fall short of spendings
debt
measures the accumulation of past deficits over time
public goods
goods for which the investment of any one individual benefits everyone in a larger group
social insurance programs
government provision of insurance against adverse events to address failures in the private insurance market
individual income tax
a tax lieved on the income
corporate tax
the funds raised by taxing the incomes of businesses
payroll tax
the taxes on worker earnings that fund social insurance programes
theoretical tools
the set of tools designed to understand the mechanics behind economic decision making
empirical tools
the set of tools designed to analyze data and answer questions raised by theoretical analysis
utility function
a mathematical function representing an individual’s set of preferences, helps determine choice
constrained utility maximization
the process of maximizing the well-being (utility) of an individual, subject to their resources (budget constraint)
models
mathematical or graphical represtentations of reality
indifference curve
a graphical representation of all bundles of goods that make an individual equally well off
marginal utility
the additional increment to utility obtained by consuming an additional unit of good
diminishing marginal utility
the consumption of each additional unit of good makes the individual less happy than the consumption of the previous one
marginal rate of substitution
the rate at which a consumer is willing to trade one good for another
budget constraint
a mathematical representation of all the combination of goods an individual can afford to buy if they spend their entire income
opportunity cost
the cost of any purchase is the next best alternative use of that money, or the forgone oportunity
substitution effect
holding utility constant, a relative rise in the price of good will always cause an individual to choose less of that good
income effect
a rise in the price of a good will typically cause an individal to choose less of that good because their income can purchase less than before
normal goods
goods for which demand increases as income rises
inferior goods
goods for which demand decreases as income rises
market
the arena in which demanders and suppliers interact
market equilibrium
the combination of price and quantity that satisfies both demand and supply
welfare economics
the study of the determinants of well-being, or welfare in society
demand curve
a curve showing the quantity of a good demanded by individuals at each price
elasticity of demand
the percantage change in the quantity demanded of a good caused by each 1% change in the price of that good
supply curve
a curve showing the quantity of a good that firms are willing to produce at each price
marginal productivity
the impact of a unit change in any input, holding other inputs constant, on the firm’s output
marginal cost
the incremantal cost to a firm of producing one more unit of a good
entitlement spending
mandatory funds for programs for which funding levels are autmatically set by the number of eligible recipients
discretionry spending
optional spending set by appropriation levels each year at Congress’s discretion
balanced budget rquirement
a law forcing a given government to balance its budget each year (spending=revenue)
ex post bbr
a law forcing a given government to balance its budget by the end of each fiscal year
ex ante bbr
a law forcing either the governor to submit a balanced budget or the legistrature to pass a balanced budget at the start of each fiscal year, or both
real prices
prices stated in some constant year’s dollars
nominal prices
prices stated in today’s dollars
consumer price index
an index that captures the change over time in the cost of purchasing a “typical” bundle of goods
cyclically adjusted budget deficit
a measure of the government’s fiscal position if the economy were operating at full potential GDP
cash accounting
a method of measuring the government’s fiscal position as the difference between current spending and current revenues
capital accounting
a method of measuring the government’s fiscal postion that accounts for changes in the value of the government’s net asset holdings
static scoring
a method used by budget modelers that assumes that government policy changes only the distribution of total resources, not the amount of total resources
dynamic scoring
a method used by budget modelers that attempts to model the effect of government policy on both the distribution of total resources and the amount of total resources
implicit obligation
financial obligations that the government has in the future that are not recognized in the annual budgetary process
present discounted value
the value of each period’s dollar amount in today’s terms
short-run stabilization issues
the role of the government in combating the peaks and troughs of the business cycle
automatic stabilization
policis that automatically alter taxes or spending in response to economic fluctuations in order to offset changes in household consumption levles
discretionary stablilization
policy actions taken by the government in response to particular instances of an underperforming or overperforming economy
integrational equity
the treatment of future generations relative to current generation
fiscal policy
involves utilizing of government spending and altering tax revenue to influence a number of economic aspects
expansionary fiscal policy
decrease in taxes or increase in spending to reduce unemployment and increase output
contractionary fiscal policy
increase in taxes or decrease in spending to control inflation
recognition lag
time it takes for the government to recognise that the country is not working to its full potential
action lag
the government might recognise the problem, but the action is delayed in time
impact lag
the time that it takes for the fiscal policy to have an impact
government budget
a document presenting anticipated government revenues and expenditures for the financial year, which may or may not correspond with the calendar year
budget allocation function
a function used to allocate jobs, tasks, functions and responsibilities
budget distribution function
it’s how we distribute what we allocate
budget stabilization function
when we use both fiscal and monetary policy
budget fiscal function
refers to taking over taxes, duty and other fees, this function focuses on gathering and sharing funds
budget vote of approval
an act of law issued by legislative body, which evaluates whether financial activity provided by executive body is lawfulÂ
provisional budget
temporary budget, for a month or a quarter until the yearly budget is adopted, it is “safe mode” in case when a budget draft resolution cannot be adopted on time
principle of equilibrium
trying to balance with budget in that way, that expenditures are equal with revenues
entireness principle
including all expenditures and revenues, not only selected ones
cohesion principle
making only one budget containing all expenditures and revenues, not more documents
operability principle
making an entity-focused budget, which means indicating tasks and funds for particular entities
one-year principle
respecting the rule that budget is prepared for only one fiscal year
openness principle
parliment’s budget work is open and apparent