Chapter 13 MacroEconomics

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Indirect fiscal policy
taxes, transfers
direct fiscal policy
direct government spending
expansionary fiscal policy effects
increases aggregate demand through cut in taxes, increase government purchases/transfers (down GDP, up unemployment, down prices); can fix recessionary gap
contractionary fiscal policy effectts
reduces aggregate demand through increase taxes, reduce government purchases/transfers (up GDP, down unemployment, up prices); can fix inflationary gap
Types of fiscal policy
discretionary, automatic stabilizers
automatic stabilizer fiscal policy
government doesn’t have to change law
issues with fiscal policy
financed through borrowing money so can crowd out investment, has lags
lags of fiscal policy
identification of the economic state, legislative (getting bill passed), implementation (takes time)
biggest spending transfer payments (social insurance)
social security, medicare, medicaid
disposable income
total income that households have available to spend
fiscal policy
how the government stabilizes the economy by shifting the aggregate demand curve
Government purchases VS change transfers/taxes
change in transfers/taxes shifts AD curve LESS than an equal sized change in government purchases
automatic stabilizers
government spending and taxation rules that cause fiscal policy to automatically help in contractions/expansions without requiring any deliberate actions by policy makers (ex. taxes that depend on disposable income)
discretionary fiscal policy
fiscal policy that is the direct result of deliberate actions by policy makers rather than automatic adjustments or rules
budget surplus
positive budget balance
budget deficit
negative budget balance
Sgovernment =
T – G – TR (tax revenues, government purchases, government transfers)
cyclically adjusted budget balance
an estimate of what the budget balance would be if real GDP were exactly equal to potential output
Should we force the government to balance it’s budget?
No, a rule requiring a balanced budget would undermine the role of automatic stabilizers
debt
sum of money a government owes at a particular point in tim
deficit
difference between the amount of money a government spends and the amount it receives
public debt
government debt held by individuals and institutions outside the government
problems by rising government debt
today’s deficits, by increasing the government’s debt, place financial pressure on future budgetstoday’s deficits, by increasing the government’s debt, place financial pressure on future budgets
debt-GDP ratio
government debt as a percentage of GDP, frequently used as a measure of a government’s ability to pay its debts
implicit liabilities
spending promises made by governments that are effectively a debt despite the fact that they are not included in the usual debt statistics
more accurate indication of the government’s fiscal health
gross debt, includes public debt and government debt held by social securities
Categories: Macroeconomics