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Fiscal Policy Basics

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Discretionary Fiscal Policy

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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.

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Cyclical Deficit

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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.

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Structural Deficit

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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.

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Regressive Tax System

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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.

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Budget Surplus

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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.

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National Debt

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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.

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Public Debt

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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.

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Crowding Out Effect

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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.

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Recurrent Budget

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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.

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Proportional Tax System

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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.

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Capital Budget

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The budget allocated by the government for investment in capital assets like infrastructure, buildings, and equipment. Example: Budget for constructing new highways and bridges.

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Progressive Tax System

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A tax system in which the tax rate increases as the taxable income increases. Example: Higher income brackets pay a higher percentage in tax.

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Fiscal Stimulus

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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.

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Budget Deficit

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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.

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Tax Revenue

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Income obtained by government through taxation. Example: Federal income taxes, sales taxes, property taxes, and tariffs.

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Expansionary Fiscal Policy

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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.

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Debt-to-GDP Ratio

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A metric that compares a country's public debt to its gross domestic product (GDP). Example: If a country's total debt is 100billionanditsGDPis100 billion and its GDP is 500 billion, the debt-to-GDP ratio is 20%.

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Fiscal Policy

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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.

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Contractionary Fiscal Policy

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A type of fiscal policy that involves increasing taxes, decreasing government expenditures, or both, to fight inflation. Example: Reducing government workforce to lower spending.

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Countercyclical Fiscal Policy

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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.

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Fiscal Year (FY)

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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.

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Automatic Stabilizers

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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.

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Government Expenditure

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All spending incurred by government agencies. Example: Expenses on public services, infrastructure, defense, and social welfare programs.

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Gross Domestic Product (GDP)

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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.

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Fiscal Multiplier

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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 2increaseinGDP.2 increase in GDP.

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