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Definition
| The federal government's use of taxes, government spending, and transfer payments to promote economic growth and stability |
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| The use of fiscal policy to regulate aggregate demand in the economy |
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Definition
the total demand for final goods and services in the economy at a given time and price level; kind of the same thing as GNP
D= C + I + G +F
with d=aggregate demand,
c= consumer goods
g= government goods
f= net exports |
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| discretionary fiscal policy |
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Definition
| Congressional actions that change taxes and government spending in response to economic instability in the economy |
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| Special tax breaks that the government extends to businesses to encourage investment in new capital |
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A major tax incentive
Permits firms to deduct from their corporate income taxes a percentage of the money they spend on new capital
-To reduce unemployment, govt raises investment tax credit to encourage businesses to spend more money on expansion and increase aggregate demand
- To reduce inflation govt decreases the investment tax credit to restrict business activity and lower aggregate demand |
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| Non-discretionary fiscal policy |
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Definition
| Automatically activated by certain built-in features of the federal tax and spending programs. AKA automatic stabilizers |
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| Stabilizers considered automatic because they provide a constant injection of money into the economy. |
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Method through which tax dollars are redistributed to nonproductive sectors of the economy (aka social programs)
- A type of automatic stabilizer |
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-Explains how small changes in income ripple through the economy and eventually cause a much larger change in spending
-Takes spending habits into account
-Activated as soon as people receive new income
MPC: marginal propensity to consume
MPS: " " " save |
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Definition
| Government actions that provide incentives for producers to increase aggregate supply |
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An economic law that declared that supply creates its own demand
-Economic growth rests on producers' willingness and ability to increase total production (aka aggregate supply) |
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1. Tax cuts on personal and corporate incomes
2. Spending cuts on social programs
3. Regulatory reform
AKA SSE |
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Definition
| higher individual incomes taxed at higher rates |
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| Limitations of fiscal policy |
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Definition
Timing problems (forecasting/identification/inflexibility)
Political constraints (dem vs rep, prez vs cong)
Unpredictable economic behaviors (MPC vs MPS predictions)
Lack of coordination (Fed vs Cong, Local vs fed govt) |
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Definition
| UN and IN rising at the same time |
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| Tax cuts can actually increase govt revenues b/c you create an incentive to I/W/P |
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Definition
Difficult to determine where we should be on Laffer curve
Can't predict eco behavior
New revenues insufficient to balance budget
Deregulation/spending cuts may bring more costs than benefits |
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