ECON 12 14 15

the federal govts use of taxes and govt spending to affect the economy

a plan to increase aggregate demand and stimulate a weak economy

a plan to reduce aggregate demand and slow the economy in a period of too rapid expansion

• public transfer payments: unemployment, food stamps
• progressive income taxes

• 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

the idea that in times of recession aggregate demand needs to be stimulated by govt action

fiscal policy to stimulate aggregate demand

• GDP=C+I+G+F
• C-consumer goods, I- investment goods, G-government goods, F-net exports

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

• an increase in govt spending can lead to economic recovery
• excessive aggregate demand can lead to inflation

• -cutting costs of production to encourage producers to supply more
• -favor cutting taxes, cuts in spending

• 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

the govt takes in more than it spends

when the govt spends more than it takes it

a govt spends more than it collects in revenue for a specific budget year

• national emergencies
• need for public goods/services
• stabilization of the economy
• role of govt in society

short term bonds (1 year)

2-10 years

for 30 years

when the govt outbids private bond interest rates to gain loanable fund

• equity-fairness
• simplicity
• efficiency - achieves goal

tax based on the value of designated goods/services at the time of sale

tax based on value of ind or businesses assets

takes the same percentage of income from all taxpayers

places a higher percentage rate of taxation on high income earners than low

ex federal income tax

high tax on low income

ex property taxes

• 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

tax on property that is transferred to others on death of owner

tax on money or property given by one living person to another

tax on the production or sale of a specific product

ex gas or telephone service

tax on goods imported into the US

money charged for the use of a good/service

• social security
• medicare
• medicaid
• food stamps, unemployment

total govt revenue from all sources is equal to total govt spending

a plan for day to day expenses

a plan for major expenses or investments

statistical measures that track the income spending and output of a nation

• GDP=C+I+G+X
• consumption
• investment
• government spending
• net exports-foreign trade

price levels for the year in which the GDP was measured

nominal GDP adjusted for changes in prices.

• 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

total amount of goods/services that households, busineses, govt, foregin purchasers wil buy at each and every price level

is the total amount of goods and services that producers will provide at each price level

when the quantity of aggregate demand equals the quantity of aggregate supply the economy reaches this

• 1. Business decisions: Demand slump, new technology
• 2. changes in interest rates
• 3. consumer expectations
• 4. external issues