Fiscal Policy

Automatic stabilizers are features of fiscal policy that adjust without new legislation to dampen the business cycle.

A budget deficit occurs when government spending exceeds its tax revenue in a given year.

A budget surplus occurs when government tax revenue exceeds its spending in a given year.

Contractionary fiscal policy is a decrease in government spending or an increase in taxes used to reduce aggregate demand and fight inflation.

Crowding out is the fall in private investment that happens when government borrowing pushes up real interest rates.

Discretionary fiscal policy is deliberate changes in government spending or taxes enacted by legislation to influence the economy.

Expansionary fiscal policy is an increase in government spending or a cut in taxes used to boost aggregate demand in a recession.

Fiscal policy is the government's use of spending and taxation to influence aggregate demand and the economy.

Fiscal and monetary policy both steer aggregate demand, but fiscal policy uses spending and taxes while monetary policy uses the money supply and interest rates.

The national debt is the total accumulated amount the government owes from past deficits not offset by surpluses.

The balanced budget multiplier equals 1: an equal rise in government spending and taxes raises real GDP by exactly the amount of the spending change.

Crowding in is when government spending raises private investment—the opposite of crowding out—typically during a recession with idle resources.

Policy lags are the delays—recognition, implementation/administrative, and impact—between an economic problem and when stabilization policy actually affects the economy.