module 11 fiscal policy

chapter 13 mcgraw hill

what is fiscal policy?

It consists of changes in the government spending and tax collection

What three things is fiscal policy intended to reach or obtain?

Reach full employment

obtain price stability

foster economic growth

What are the two types fiscal policy?

Discretionary

Non-Discretionary

What is a discretionary policy change?

Changes in Policy that are at the OPTION of the GOVERNMENT . Must pass through congress ands approved by President TAKES YEARS TO IMPLEMENT ex) big beautiful bill

What is a non-discretionary policy?

Changes in taxes and government spending happen a little more faster

What government agency in fiscal policy assist the president on economic matters?

The CEA of Council of Economic Advisers (consists of three people) HIGHLY POLITICAL

What is expansionary fiscal policy

increase in government purchases of goods and services that

decrease in taxes

to hopefull promote economic expansion

WHat is the keynesian Multiplier effect?

theory that the economy will flourish the more the govt spends on goods and services instead of decreasing taxes. INCREASING AGGREGATE DEMAND

what is contractionary fiscal policy?

A decrease in government purchases

increase in taxes

done to hopefully contract the economy if necessary or if we are going too fast

not good politically so it rarely happens

DECREASING AGGREGATE DEMAND AND CONTROLLING INFLATION

what do taxes act like

A buil,t in stabilizer (automatically adjusted depending on GDP)

During recessions does the government increase/decrease budget deficits or increase/reduce budget surplus

INCREASE BUDGET DEFICIT

DECREASE BUDGET SURPLUS

During expansion will taxes increase or decrease the budget surplus or increase/reduce budget deficit

TAXES will INCREASE budget surplus ; reduce budget deficit

What do higher taxes ultimately lead to ?

they lead to a reduction in spending, and reduction in aggregate demand

WHat are some tax systems in place now

Progressive Taxes: income tax (tax brackets)

Proportional Tax: same tax not depending on income

regressive tax: tax where average tax rate decreases the more you make (trickle down econ)

What are some issues with actually implementing fiscal policy as a whole ?

Recognition lag : time period between recession or expansion

administrative Lag :time period between recognizing issues and implementing them ex) 9/11

operational lag : time between action being ordered and it taking effect

WHat are some politcial considerations one must account for in fiscal policy?

fluctuation in economy happen due to congress destabilizing economy after and before elections

What three areas does government spending cover?

Balanced Budget

Budget Deficit

Budget surplus

WHat is a balanced budget

when govt. spending and taxes are equal

budget deficit: when govt spending > money received in taxes in year

BUdget Surplus: Govt spending < Taxes received

WHat are two normative taxation principles

Abiltiy to pay priniciple - More income means a higher tax rate, because people earn more money they should bear more of the cost of social programs

benefit principal - tax payers should pay proportional to what they earn. ex) everyone taxed at 30 percent

what is a corporate income tax

tax on corporate profits

what is an estate and gift tax

tax on people who pass assets to next generations

what is an excise tax

Taxes on a specific good like alcohol that is inherently dangerous to society. Meant to dissuade people from producing dangerous or unhealthy things.

what is a marginal tax rate?

tax one pays on the higher income one earns. we have that

how much of GDP have federal tax revenues accounted for

17-20 percent of total GDP

WHat are the main sources of taxes from state and local taxes?

sales tax, property tax, and revenue from federal government

WHat is the National Debt?

total accumulated amount the government has borrowed, over time and not yet paid back .

the government has run budget deficits for decades

What is the Debt/GDP ratio?

FEderal debt is the sum of annual budget deficits and surpluses.

Annual deficits do not always mean that the debt/GDP ratio is rising

SHoudl a government have to balance their budget ?

Most would argue that they shouldn’t because its a tool used to expand or contract the economy

WHat is an automatic stabilizer?

These are tax and spending rules that automatically help the economy stay stable — they slow down a drop in spending when the economy is weak, and they help cool down spending when the economy is growing too fast, all without needing new laws to be passed.

WHat are examples of automatic stabilizers?

full employment budget

unemployment

food stamps

corporate income tax

WHat is the crowding out effect?

federal spending and borrowing that cause business rates to rise and investments to fail , can also be caused by tax cuts

What is one theory of the crowding out effect

that public spending (govt spending) drives down private sector spending

private companies can not compete with the federal government

What are the 3 main typed of crowding out effects

1.) economic

2) social welfare

3.) infrastructure

WHat is economic crowdin out

When the government borrows a lot of money, it can use up funds that businesses might have used to invest. This is called 'crowding out.' But this mainly happens when the economy is already running at full capacity. If the economy is still weak, government spending can actually help more without pushing out private investment

WHat is social welfare crowding out ?

Social welfare crowding out happens when the government raises taxes to pay for welfare programs. Because people and businesses have less extra money after taxes, they might give less to charities and private causes

What is infrastructure crowding out?

Sometimes when the government spends money on big infrastructure projects, like roads or bridges, private companies might avoid doing similar projects nearby because they think it won’t be worth it. But overall, public infrastructure can still help boost private investment too.