Long-Run Growth and Fiscal Policy Tradeoffs (AP Macroeconomics Unit 5)

Government budget deficit

A situation where government spending exceeds tax revenue (net taxes) in a given period, usually a year; implies negative public saving.

Net taxes (T)

Tax revenue minus transfer payments; used in AP Macroeconomics when calculating public saving and the budget balance.

Transfer payments

Government payments to households that are not made in exchange for goods or services (e.g., unemployment benefits); counted as government outlays and subtracted when finding net taxes.

Government purchases (G)

Government spending on goods and services (not transfers); the “G” in public saving and national saving identities.

Public saving (S_public)

The government’s budget position measured as S_public = T − G; negative public saving indicates a budget deficit.

Budget surplus

When the government’s net taxes exceed its purchases (T > G), allowing it to pay down existing debt rather than borrow more.

Government securities (Treasury bills/notes/bonds)

Financial instruments the government issues to borrow funds and finance budget deficits; borrowing increases the national debt.

National debt

The total amount the government owes from past borrowing; a stock variable measured at a point in time.

Flow variable

A variable measured per unit of time (e.g., the annual budget deficit).

Stock variable

A variable measured at a point in time (e.g., the national debt).

Debt accumulation identity

The accounting idea that (ignoring valuation changes) Debtt = Debt{t−1} + Deficit_t.

Cyclical deficit

A deficit that occurs because of the business cycle (e.g., recession lowers tax revenue and raises certain spending automatically) even without new policy changes.

Structural deficit

A deficit that persists even when the economy is at or near full employment, usually because ongoing spending commitments exceed ongoing revenues.

Automatic stabilizers

Budget components that change automatically with the business cycle (e.g., unemployment benefits rise and tax revenue falls in recessions), affecting the deficit without new laws.

National saving (S)

The portion of income not used for consumption or government purchases; S = Y − C − G, and it funds investment in the loanable funds market.

Private saving (S_private)

Saving by households and firms; together with public saving it makes up national saving (S = Sprivate + Spublic).

Loanable funds market

A model where the supply of loanable funds comes from saving and demand comes from borrowing (especially for investment); the real interest rate equilibrates saving and investment.

Real interest rate

The inflation-adjusted interest rate; the real cost of borrowing and real return to saving, central to long-run investment and growth analysis.

Crowding out

When deficit-financed government borrowing reduces private investment by decreasing national saving, shifting loanable funds supply left, and raising the real interest rate.

Investment (I)

Spending on new capital goods (machines, factories, technology) that increases the economy’s capital stock; not the same as buying financial assets.

Capital stock

The economy’s accumulated physical capital; grows through investment and is a key driver of long-run productive capacity.

Capital accumulation

The process of increasing the capital stock over time through investment; supports higher long-run output and growth.

Production possibilities curve (PPC)

A curve showing maximum combinations of goods and services an economy can produce with current resources and technology; long-run growth is an outward shift of the PPC.

Long-run aggregate supply (LRAS)

The level of output at full employment (potential output); long-run economic growth is shown as a rightward shift of LRAS.

Real GDP per capita

Real GDP per person; a key measure of living standards and a focus when evaluating long-run growth, especially when population is changing.