Fiscal Policy

Fiscal Policy

The federal government efforts to keep the economy stable by increasing or decreasing taxes or government spending.

Employment Act of 1946

law that assigned to the federal government the responsibility for promoting full employment and price stability

Council of Economic Advisers

A three-member body appointed by the president to advise the president on economic policy.

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

when the government spends more money than it collects in taxes

Contractionary Fiscal Policy

Fiscal policy used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation.

Budget Surplus

a situation in which the government takes in more than it spends

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. Ex) Government spending is a built-in stabilizer

Progressive Tax System

a tax whose average tax rate increases as the taxpayer’s income increases and decreases as the tax payer’s income decreases

Proportional Tax System

The average tax rate remains constant as GDP rises.

Regressive Tax System

marginal tax rate decreases as level of income increases

Full-employment Budget

What the federal budget would be if the economy were producing at a full-employment level of output.

Cyclical Deficit

a federal budget deficit that is caused by a recession and the consequent decline in tax revenues

Political Business Cycle

Attempts by elected officials to manipulate the economy, increasing economic growth and reducing unemployment and inflation around election time, with the goal of improving evaluations of their performance in office.

Crowding-Out Effect

The offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending

Net Export Effect

the ideas that the impact of a change in monetary policy or fiscal policy will be strengthened or weakened by the consequent change in net exports. the change in net exports occurs because of changes in real interest rates, which affect exchange rates.

Real-Balance Effect

The tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level.

Interest-Rate Effect

effect that decreases price level has on investment expenditures through the effect that a chance in price level has on interest rates