fiscal policy Ib economics
Terms in this set (23)
Government policy that attempts to manage the economy by controlling taxing and spending.
Government income from taxes and non-tax sources. These may include loans and lottery income.
Government spending on the day-to-day running of the public sector, including raw materials and wages of public sector workers.
investment spending on fixed assets such as the purchase of land and buildings
Benefits given by the government directly to individuals. Transfer payments may be either cash transfers, such as Social Security payments and retirement payments to former government employees, or in-kind transfers, such as food stamps and low-interest loans for college education.
a budget is balanced when current expenditures are equal to receipts
the difference between tax revenue and government spending when government spending exceeds tax revenue
a situation in which the government takes in more than it spends
all of the money borrowed by the government and not yet repaid, plus the accrued interest on that money; also called the national debt or federal debt
payments by the government to households for which the government does not receive a new good or service in return
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
contractionary fiscal policy
reduces aggregate demand, increase in taxes, decrease in spending, to decrease real output
a model of short-run aggregate economic fluctuations, which attributes short-run deviations in output from potential to variations in the level of aggregate demand or aggregate supply
monetarist/neo classical model
In long run, potential GDP is independent of price level/vertical/perfectly inelastic
changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action
An effect in economics in which an increase in spending produces an increase in national income and consumption greater than the initial amount spent.
discretionary fiscal policy
Changes in taxes or spending that are the result of deliberate changes in government policy.
change in consumption/change in income
MPS (marginal propensity to save)
the increase in household savings when disposable income rises by $1
Marginal rate of taxation
change in tax/change in gross income
strengths of fiscal policy
Pulling an economy out of a deep recession.
Dealing with rapid and escalating
Ability to target sectors of the economy.
Direct impact of government spending on
Ability to affect potential output.
weaknesses of fiscal policy
Problems of time lags.
Inability to deal with supply-side causes of instability.
In a recession, tax cuts may not be very
effective in increasing aggregate demand.
Inability to 'fine tune' the economy.
a decline in private expenditures as a result of an increase in government purchases