Chapter 11: Fiscal Policy, Deficits, and Debt

council of economic advisors

an executive agency responsible for providing economic advice to the President

expansionary fiscal policy

An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output

budget deficit

an excess of expenditures over revenues

contractionary fiscal policy

A decrease in government spending or an increase in taxes

budget surplus

an excess of tax revenue over government spending

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

measures what the Federal budget deficit or surplus would be without existing tax rates and the government spending levels if the economy had achieved its full-employment level of GDP in each year

cyclical deficit

A federal budget deficit that is caused by a recession and the consequent decline in tax revenues Ex) When the economy is in a recession and the government doesn't get as many taxes

recognition lag

The time period after a policy change is needed from a stabilization standpoint but before the need is recognized by policy makers.

administrative lag

The time period after the need for a policy change is recognized but before the policy is actually implemented.

operational lag

(PoT) the effects after fiscal policy occurs may take a while till any change occurs. tax changes usually quicker then changes in spending

political business cycles

economic fluctuations that occur when discretionary policy is manipulated for policital gain

crowding out effect

This occurs when government spending is financed through borrowing from the private sector, which puts upward pressure on interest rates and stop private investors who cannot afford to borrow at the higher rates of interest.

public debt

The total amount of money that the national government owes as a result of borrowing; also called the national debt.

US securities

financial instruments issued by the Fed to borrow money to finance expenditures that exceed tax revenues

external public debt

The portion of the public debt owed to foreign citizens, firms, and institutions

fiscal policy

a government policy for dealing with the budget (especially with taxation and borrowing)

built in stabilizer

A mechanism that increases government's budget deficit (or reduces its surplus) during a recession and increases government's budget surplus (or reduces its deficit) during inflation without any action by policymakers. The tax system is one such mechanism

progressive tax

any tax in which the rate increases as the amount subject to taxation increases

public investments

Governemnt expenditures on public capital (such as roads, highways, bridges, mass transit systems, and electric power facilities) and on human capital (such as education, training, and health).