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Fiscal Policy Basics
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Discretionary Fiscal Policy
Fiscal policy measures implemented by choice of the government to stabilize the economy, rather than set by existing statutes. Example: A new infrastructure bill to spur job growth.
Cyclical Deficit
A type of budget deficit that occurs when an economy is operating below its potential output, typically during a recession. Example: Lower tax revenues due to high unemployment in a downturn.
Structural Deficit
A budget deficit that exists regardless of the economy's cyclical position, caused by a fundamental imbalance in revenues and expenses. Example: Persistent deficits due to high levels of government entitlement spending.
Regressive Tax System
A tax system where the tax rate decreases as the amount subject to taxation increases. Example: Sales tax that takes a larger percentage from low-income earners.
Budget Surplus
Occurs when a government's revenues exceed its expenditures during a specific time period. Example: Excess taxes from economic growth leading to more revenue than planned government spending.
National Debt
The total amount of money that a country's government has borrowed, typically as a result of budget deficits. Example: Sum of all past budget deficits minus budget surpluses.
Public Debt
The amount of money a government owes to lenders outside of itself, often referred to as national debt. Example: Sum total of all government bonds issued to the public and foreign entities.
Crowding Out Effect
Occurs when increased public sector spending leads to a reduction in private sector spending, which dampens the initial boost from government spending. Example: Government borrowing raises interest rates, which decrease private investment.
Recurrent Budget
The government budget that is used for non-investment day-to-day spending, such as salaries, maintenance, and interest payments. Example: Yearly budgeting for the operational costs of running a government department.
Proportional Tax System
A tax system where the tax rate is fixed and does not change according to the taxable base (income, property, or sales). Example: A flat income tax rate of 10% for all income levels.
Capital Budget
The budget allocated by the government for investment in capital assets like infrastructure, buildings, and equipment. Example: Budget for constructing new highways and bridges.
Progressive Tax System
A tax system in which the tax rate increases as the taxable income increases. Example: Higher income brackets pay a higher percentage in tax.
Fiscal Stimulus
A policy intended to encourage economic growth or combat economic slowdowns via government spending and tax cuts. Example: An increase in infrastructure spending aimed at reducing unemployment.
Budget Deficit
A financial situation where a government's expenditures exceed its revenues, resulting in a need to borrow money. Example: Government spends more on social programs than it collects in taxes in a given year.
Tax Revenue
Income obtained by government through taxation. Example: Federal income taxes, sales taxes, property taxes, and tariffs.
Expansionary Fiscal Policy
A form of fiscal policy that involves decreasing taxes, increasing government expenditures, or both in order to fight economic recessions. Example: A government tax rebate to stimulate consumer spending.
Debt-to-GDP Ratio
A metric that compares a country's public debt to its gross domestic product (GDP). Example: If a country's total debt is 500 billion, the debt-to-GDP ratio is 20%.
Fiscal Policy
Governmental adjustment of its spending levels and tax rates to monitor and influence a nation's economy. Example: Increasing government spending on infrastructure during a recession.
Contractionary Fiscal Policy
A type of fiscal policy that involves increasing taxes, decreasing government expenditures, or both, to fight inflation. Example: Reducing government workforce to lower spending.
Countercyclical Fiscal Policy
Fiscal policy that acts against the cyclical tendencies of an economy, such as increasing spending or reducing taxes during a recession. Example: A stimulus package passed during economic downturns.
Fiscal Year (FY)
A government's operating year, typically a 12-month period used for budgeting and accounting purposes. Example: In the United States, the fiscal year is October 1 to September 30.
Automatic Stabilizers
Revenue and expenditure mechanisms in fiscal policy that automatically adjust with the economic cycle without additional government action. Example: Progressive income taxes increase revenue during booms and provide relief during downturns.
Government Expenditure
All spending incurred by government agencies. Example: Expenses on public services, infrastructure, defense, and social welfare programs.
Gross Domestic Product (GDP)
The total value of all goods and services produced within a country in a specific time period. Example: Total value of all economic output in the United States in a year.
Fiscal Multiplier
The ratio of a change in national income to the change in government spending that causes it. Example: A multiplier of 2 means that for every dollar of government spending, there is a
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