Government Budgets and Fiscal Policy Notes

Government Spending
- The federal budget includes a detailed spending plan.
- For FY 2021, total spending was $4.829 trillion with a deficit of $966 billion.
Taxation
- Various types of taxes:
- Proportional Tax: Flat percentage rate.
- Regressive Tax: Higher income earners pay a smaller proportion.
- Corporate Income Tax: Tax on corporate profits.
- Excise Tax: Specific goods (e.g. gasoline, tobacco).
- Estate and Gift Tax: On transferred assets after death or as gifts.
Federal Budget Definitions:
- Budget Surplus: When tax collections exceed expenditures.
- Budget Deficit: When spending exceeds tax revenues.
- Balanced Budget: When spending equals tax revenues.
- National Debt: Accumulated total of past deficits and surpluses.

Discretionary Fiscal Policy
- Intentional changes in federal taxes and spending aimed at achieving macroeconomic goals.
Automatic Stabilizers:
- Tax and spending rules that help stabilize the economy without new legislation.
- Examples are unemployment insurance and food stamps.

Expansionary Fiscal Policy:
- Used when GDP is below potential to stimulate the economy.
- Results in a rightward shift of the AD curve, moving toward long-run equilibrium.
Contractionary Fiscal Policy:
- Implemented when GDP exceeds potential to reduce inflation.
- Causes a leftward shift of the AD curve, seeking equilibrium.

Actions taken by the government in response to economic fluctuations.
The model assumes that other factors remain stable, focusing on fiscal changes related to recession and inflation.

Spending Multiplier:
- Reflects the change in aggregate demand resulting from initial spending increases. Formula:
  ext{Spending Multiplier} = rac{ ext{Change in Y}}{ ext{Change in G}} = rac{1}{1 - ext{MPC}}
- If MPC (Marginal Propensity to Consume) is 0.75, the multiplier is 4.
Tax Multiplier:
- Indicates the effect of a tax change on real GDP. Generally lower than the spending multiplier.
- Formula:
  ext{Tax Multiplier} = rac{ ext{Change in Y}}{ ext{Change in Taxes}}

Timing Issues:
- Recognition Lag: Delay in recognizing economic shifts.
- Legislative Lag: Time needed for policy formulation.
- Implementation Lag: Delay in policy effectiveness.
Crowding Out:
- High government spending may limit private sector investment due to raised interest rates.

Short-term fluctuations in budget deficits and surpluses are expected.
Long-term deficits can be acceptable if they lead to investments that boost productivity.

Stimulus Package:
- Included tax cuts and spending increases totaling $840 billion, aimed at economic recovery.
- Concluded that it mitigated recession severity but did not achieve full employment.
CARES Act (2020):
- $2.2 trillion stimulus with cash payments and increased unemployment benefits during COVID-19 pandemic, highlighting the ongoing need for fiscal intervention in crises.