Chapter 13 – Macroeconomics

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fiscal policy
also called discretionary fiscal policy; changes in govt spending and tax collections designed to achieve a full employment and noninflationary domestic output
nondiscretionary fiscal polichy
passive or automatic fiscal policy changes that take place without congressional action
Council of Economic Advisers CEA
a group of three persons that advises and assists the president of the United States on economic matters
expansionary fiscal policy
an increase in govt 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
the amount by which the expenditures of the Federal govt exceed its revenues in any year
contractionary fiscal policy
a decrease in govt purchases of goods and services, an increase in net taxes, or some combination of the two, for the purpose of decreasing aggregate demand and thus controlling inflation
budget surplus
the amount by which the revenues of the Federal govt exceed its expenditures in any year
built-in stabilizer
a mechanism that increases govt’s budget deficit (or reduces its surplus) during a recession and increases govt’s budget surplus (or reduces its deficit) during an expansion without any action by policymakers. the tax system is one such mechanism
progressive tax system
a tax whose average tax rate increases as the taxpayer’s income increases and decreases as the taxpayer’s income decreases
proportional tax system
a tax whose average tax rate remains constant as the taxpayer’s income increases or decreases
regressive tax system
a tax whose average tax rate decreases as the taxpayer’s income increases and increases as the taxpayer’s income decreases
cyclically adjusted budget
a comparison of the govt expenditures and tax collections that would occur if the economy operated at full employment throughout the year; the full employment budget; helps to determine if the govt’s policy is expansionary, contractionary, or neutral
cyclical deficit
a Federal budget deficit that is caused by a recession and the consequent decline in tax revenues
political business cycle
fluctuations in the economy caused by the alleged tendency of Congress to destabilize the economy by reducing taxes and increasing govt expenditures before elections and to raise taxes and lower expenditures after elections
crowding out effect
a rise in interest rates and a resulting decrease in planned investment caused by the Federal govt’s increased borrowing to finance budget deficits and refinance debt; is a potential flaw or a result of expansionary fiscal policy
public debt
the total amount owed by the Federal govt to the owners of govt securities; equal to the sum of past govt budget deficits less govt budget surpluses
US Securities
ULS Treasury bills, notes, and bonds used to finance budget deficits; the components of the public debt
external public debt
the portion of the public debt owed the foreign citizens, firms, and institutions
public investments
Govt expenditures on public capital (infrastructure) and on human capital (such as education, training, and health)
ratchet effect
when aggregate demand decreases, price levels tend to become inflexible
Categories: Macroeconomics