Macroeconomics Ch 13 Fiscal Policy

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Sources of Tax Revenues
Income Tax and Social Insurance Tax
Government Spending
Medicare, Medicaid, Social Security, Education
Social Security
Gov’t Transfer
Provides guaranteed income to older Americans, disabled Americans, and the surviving spouses adn dependents of deceased or retired beneficiaries
Medicare
Gov’t Transfer
Covers much of the cost of health care for Americans over 65
Medicaid
Gov’t Transfer
Covers much of the cost of healthcare for Americans with low income
Social Insurance
Gov’t programs that are intended to protect families against economic hardships
ex. unemployment, food stamps, Medicare, Medicaid
Aggregate Spending
Total spending on final goods and services in an economy
C + I + G + X – IM
Disposable Income
= total income – taxes + gov’t transfers
increase in disposable income = increase in consumer spending
Expansionary Fiscal Policy
increase in gov’t purchases of goods and services
cut in taxes
increase in gov’t transfers
Contractionary Fiscal Policy
reduction in gov’t purchases of goods and services
increase in taxes
reduction in gov’t transfers
Claim: Gov’t spending crowds out private spending
WRONG: in recessionary gap there are unemployed resources in teh economy and income is below potential. Fiscal policy put unemployed resources to work adn generates higher spending and higher income
Claim: borrowing crowds out private investment spending
WRONG: depends. if economy is depressed (less than full employment) a fiscal expansion will lead to higher incomes, which leads to increased savings at any given interest rate
Claim: Gov’t budget deficits lead to reduced private spending
Ricardian Equivalence: consumers anticipating paying off increased taxes in the future will cut spending today
WRONG: doubtful consumers behave with foresight. Even fiscal policy that takes form of temporary tax cuts or transfers to consumers has expanionary effect
Multiplier
= 1/1-MCP
taxes reduce size of multiplier
Lump Sum Taxes
amount of tax a household owes is independent of its income. No chane in multiplier
Automatic Stabilizers
Gov’t spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts adn automatically contractionary when the ecnomy expands
GDP falls, tax revenue falls
Economy expands, gove’t automatically enacts a tax increase
Discretionary Fiscal Policy
result of deliberate actions by policy makers rather than rules
Budget Balance
= Tax revenue – Gov’t purchases – Transfers
Cyclically Adjusted Budget Balance
an estimate of what the budget balance would be if real GDP were exactly equal to potential output. Doesnt’ fluctuate as much as read budget
Public Debts
gov’t debt held by individuals and institutions outside the gov’t
Problem
When economy is in full employment adn the gov’t borrows funds in financial markets, it is competing with firms that plan to borrow funds for investment spending
crowd out firms
raise interest rates
reducing long run economic growth
Debt-GDP Ratio
gov’t debt as a percent of GDP
Implicit Liabilities
spending promises made by the gov’t that are effectively a debt despite the fact that they are not included in teh usual debt statistics
Social Security (largest), Medicare, Medicaid
Categories: Macroeconomics