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The annual statement of the federal government’s outlays and tax revenues is
the federal budget
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The federal budget has two purposes:
- finance the business of government
- pursue the government's fiscal policy
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The use of the federal budget to achieve macroeconomic objectives, such as full employment, sustained economic growth, and price level stability, is
Fiscal Policy
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Revenues come from:
- personal income taxes
- corporate income taxes
- indirect income taxes
- investment income
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Outlays are:
- transfer payments
- expenditures on goods and services
- debt interest
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If revenues exceed outlays, the government has a
surplus budget
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If outlays exceed revenues, the government has a
deficit budget
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If revenues equal outlays, the government has a
balanced budget
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Government debtis the total amount that the government borrows. It is the sum of:
the past deficit budgets minus the sum of the past surplus budgets
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An income tax _______ the _______
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The vertical gap between the before-tax
and after-tax wage rates is
the tax wedge
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When the quantity of labour employed decreases, potential GDP.....
decrease
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Real after tax rate % =
(Nominal Interest Rate %)(1-Tax Rate %) - Inflation %
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Discretionary fiscal policy is a policy action that is
initiated by an act of Parliament.
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Automatic fiscal policyis a change in fiscal policy that is
Triggered by the state of the economy
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An increase in government expenditure or a tax cut ______ aggregate demand.
- increases
- *The multiplier process increases aggregate demand further*
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A decrease in government expenditure or a tax increase ________ aggregate demand.
decreases
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The magnification effect of a change in government expenditure on goods and services on aggregate demand is the
Government expenditure multiplier
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The magnification effect of a change in autonomous taxes on aggregate demand is the
Autonomous tax multiplier
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The magnification effect on aggregate demand of a simultaneous change in government expenditure and taxes that leaves the budget balance unchanged is the
Balanced budget multiplier
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Recognition Lag
Is the time it takes to figure out that fiscal policy actions are needed.
-
Law-Making Lag
Is the time it takes parliament to pass the laws needed to change taxes or spending.
-
Impact Lag
- Is the time it takes from passing a tax or spending change to its effects on real GDP being
- felt.
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Automatic stabalizers are
- mechanisms that stabilize real GDP without explicit action by the government.
- Induced taxes and needs-tested spending are automatic stabilizers.
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Taxes that vary with real GDP are
Induced taxes
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When the economy is in a recession, unemployment is _____ and transfer payments ______.
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When the economy expands, unemployment _____ and transfer payments ______.
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Induced taxes and transfer payments _______ the multiplier effects of changes in autonomous expenditure.
decrease
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The budget balance that would occur if the economy were at full employment and real GDP were equal to potential GDP is the
Structural surplus or deficit
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The actualy surplus or deficit minus the structural surpllus or deficit is the
Cyclical surplus or deficit
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