Chapter 30: Fiscal Policy, Deficits, and Debt

Fiscal policy

Deliberate changes in government spending and tax collections designed to achieve full employment, control inflation, and encourage economic growth

Council of Economic Advisers (CEA)

A group of three economists appointed by the president to provide expertise and assistance on economic matters

Expansionary fiscal policy

Used to stimulate the economy during a recession

Budget deficit

Government spending in excess of tax revenues

Transfer payments

________ (or "negative taxes) "behave in the opposite way from tax revenues.

Contractionary fiscal policy

Used to control demand-pull inflation

Budget surplus

Tax revenues in excess of government spending

Built-in stabilizer

Anything that increases the government’s budget deficit (or reduces its budget surplus) during a recession and increases its budget surplus (or reduces its budget deficit) during an expansion without requiring explicit action by policymakers

Progressive tax system

The average tax rate rises with GDP

Proportional tax system

The average tax rate remains constant as GDP rises

Regressive tax system

The average tax rate falls as GDP rises

large public debt

A wealthy, highly productive nation can incur and carry a(n) ________ more easily than a poor nation can.

Fiscal policy

Deliberate changes in government spending and tax collections designed to achieve full employment, control inflation, and encourage economic growth

Council of Economic Advisers (CEA)

A group of three economists appointed by the president to provide expertise and assistance on economic matters

Expansionary fiscal policy

Used to stimulate the economy during a recession

Budget deficit

Government spending in excess of tax revenues

Contractionary fiscal policy

Used to control demand-pull inflation

Budget surplus

Tax revenues in excess of government spending

Built-in stabilizer

Anything that increases the governments budget deficit (or reduces its budget surplus) during a recession and increases its budget surplus (or reduces its budget deficit) during an expansion without requiring explicit action by policymakers

Progressive tax system

The average tax rate rises with GDP

Proportional tax system

The average tax rate remains constant as GDP rises

Regressive tax system

The average tax rate falls as GDP rises

Standardized budget

Full employment budget; used to adjust actual Federal budget deficits and surpluses to account for the changes in tax revenues that happen automatically whenever GDP changes

Cyclical deficit

A by-product of the economys slide into recession

Recognition lag

Time between the beginning of recession or inflation and the certain awareness that it is actually happening

Administrative lag

Significant lag between the time the need for fiscal action is recognized and the time action is taken

Operational lag

Lag between the time fiscal action is taken and the time that action affects output, employment, or the price level

Political business cycles

Politicians stimulating the economy before their re-election and then using contractionary fiscal policy to dampen the excessive aggregate demand that they caused with their pre-election stimulus

Crowding out effect

An expansionary fiscal policy (deficit spending) may increase the interest rate and reduce investment spending, thereby weakening or canceling the stimulus of the expansionary policy

Public debt

Total accumulation of the deficits (minus the surpluses) the Federal government has incurred through time

US securities

Financial instruments issued by the Federal government to borrow money to finance expenditures that exceed tax revenues

External public debt

In return for the benefits derived from the borrowed funds, the United States transfers goods and services to foreign lenders

Public investments

Part of the government spending enabled by the public debt is for public investment outlays (for example, highways, mass transit systems, and electric power facilities) and "human capital" (for example, investments in education, job training, and health)

Standardized budget

Full employment budget; used to adjust actual Federal budget deficits and surpluses to account for the changes in tax revenues that happen automatically whenever GDP changes

Cyclical deficit

A by-product of the economy’s slide into recession

Political business cycles

Politicians stimulating the economy before their re-election and then using contractionary fiscal policy to dampen the excessive aggregate demand that they caused with their pre-election stimulus

Crowding out effect

An expansionary fiscal policy (deficit spending) may increase the interest rate and reduce investment spending, thereby weakening or canceling the stimulus of the expansionary policy

Public debt

Total accumulation of the deficits (minus the surpluses) the Federal government has incurred through time

US securities

Financial instruments issued by the Federal government to borrow money to finance expenditures that exceed tax revenues

External public debt

In return for the benefits derived from the borrowed funds, the United States transfers goods and services to foreign lenders

Public investments

Part of the government spending enabled by the public debt is for public investment outlays (for example, highways, mass transit systems, and electric power facilities) and “human capital” (for example, investments in education, job training, and health)