Fiscal Policy

Fiscal Policy

How the government uses spending and taxation to influence the economy, particularly aggregate demand (AD).

Expansionary Fiscal Policy

Involves increasing government spending or cutting taxes to boost the economy.

Contractionary Fiscal Policy

Involves decreasing government spending or raising taxes to slow down the economy.

Budget Deficit

Occurs when government spending exceeds government revenue in a given year.

Budget Surplus

Occurs when government spending is less than government revenue in a given year.

National Debt

The total of all past deficits of a government.

Effect of Deficit on National Debt

A budget deficit increases national debt.

Effect of Surplus on National Debt

A budget surplus decreases national debt.

Bond

A debt certificate issued to finance government deficits.

Bond Market

The market where governments issue bonds, which are purchased by investors.

Inverse Relationship between Bond Prices and Yields

As bond prices rise, yields fall, resulting in lower borrowing costs for the government.

Crowding Out Effect

Occurs when government deficit spending leads to higher interest rates, which reduces private investment and consumption.

Liquidity Trap

A situation in a deep recession where interest rates remain low despite increased government borrowing.

Short-Run Fiscal Impact

Expansionary fiscal policy can boost GDP in the short run.

Long-Run Fiscal Impact

Sustained deficits can lead to higher interest rates, reducing private investment and slowing long-term economic growth.