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What is Fiscal Policy?
the federal govts use of taxes and govt spending to affect the economy
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Expansionary Fiscal Policy
a plan to increase aggregate demand and stimulate a weak economy
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contractionary fiscal policy
a plan to reduce aggregate demand and slow the economy in a period of too rapid expansion
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automatic stabilizers
- public transfer payments: unemployment, food stamps
- progressive income taxes
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Limitations of Fiscal Policy
- Policy Lags: getting congress to move on issue
- Timing Issues
- Rational Expectations Theory: ind and firms expect that changes in fiscal policy will have particular outcomes and take action
- Political Issues
- Regional Issues
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Keynesian economics
the idea that in times of recession aggregate demand needs to be stimulated by govt action
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demand side fiscal policy
fiscal policy to stimulate aggregate demand
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Keynesian theory
- GDP=C+I+G+F
- C-consumer goods, I- investment goods, G-government goods, F-net exports
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Role of govt in Keynesian
fed govt step in when the economy is using expansionary fiscal policy to promote full employment
when inflation is high the govt should use contractionary fiscal policy to keep prices from rising
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Demand Side Policies
- an increase in govt spending can lead to economic recovery
- excessive aggregate demand can lead to inflation
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Supply Side Fiscal Policy
- -cutting costs of production to encourage producers to supply more
- -favor cutting taxes, cuts in spending
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Laffer Curve
- a graph to illustrate how tax cuts affect tax revenues and economic growth
- the higher the tax rate, the likelier it is that people will take some type of action to avoid paying more taxes
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budget surplus
the govt takes in more than it spends
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budget deficit
when the govt spends more than it takes it
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deficit spending
a govt spends more than it collects in revenue for a specific budget year
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Causes of Deficit
- national emergencies
- need for public goods/services
- stabilization of the economy
- role of govt in society
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treasury bills
short term bonds (1 year)
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treasury notes
2-10 years
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treasury bonds
for 30 years
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crowding out effect
when the govt outbids private bond interest rates to gain loanable fund
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criteria for taxation
- equity-fairness
- simplicity
- efficiency - achieves goal
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sales tax
tax based on the value of designated goods/services at the time of sale
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property tax
tax based on value of ind or businesses assets
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proportional tax
takes the same percentage of income from all taxpayers
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progressive tax
places a higher percentage rate of taxation on high income earners than low
ex federal income tax
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regressive
high tax on low income
ex property taxes
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impact of taxes on the economy
- resource allocation: increase costs of production and therefore shift the supply curve left
- productivity and growth: high interest rate on taxes people save less
- economic behavior: tax incentive and sin taxes
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estate tax
tax on property that is transferred to others on death of owner
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gift tax
tax on money or property given by one living person to another
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excise tax
tax on the production or sale of a specific product
ex gas or telephone service
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customs duty
tax on goods imported into the US
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user fee
money charged for the use of a good/service
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entitilements
- social security
- medicare
- medicaid
- food stamps, unemployment
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balanced budget
total govt revenue from all sources is equal to total govt spending
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operating budget
a plan for day to day expenses
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capital budget
a plan for major expenses or investments
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national income accounting
statistical measures that track the income spending and output of a nation
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components of GDP
- GDP=C+I+G+X
- consumption
- investment
- government spending
- net exports-foreign trade
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nominal GDP
price levels for the year in which the GDP was measured
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real GDP
nominal GDP adjusted for changes in prices.
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business cycle
- 1. expansion- easy to find jobs, more resources are needed (1991-2000)
- 2. Peak
- 3. Contraction-recession, depression bc producers cut back bc less resources available
- 4. trough
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aggregate demand
total amount of goods/services that households, busineses, govt, foregin purchasers wil buy at each and every price level
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aggregate supply
is the total amount of goods and services that producers will provide at each price level
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macroeconomic equillibrium
when the quantity of aggregate demand equals the quantity of aggregate supply the economy reaches this
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Why do business cycles occur
- 1. Business decisions: Demand slump, new technology
- 2. changes in interest rates
- 3. consumer expectations
- 4. external issues
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