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Chapter 12 - Chapter 12 Fiscal Stimulus eliminate...

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Chapter 12 Fiscal Stimulus – eliminate unemployment Step up government spending Tax cuts Increase transfers Fiscal Restraint – keep inflation under control less spending tax hikes reduced transfers Decrease in Taxes and Increase in Government Spending @ the same time Throws government budget out of balance. Deficit Spending- government borrows funds to pay for spending that exceeds tax revenue Budget Deficit = government spending – tax revenue Keynes – budget deficits and surplus are just routine byproduct of countercyclical fiscal policy Goal of macroeconomy is not to balance the budget but to balance the economy at full employment Fiscal Year – 12 month period used for accounting purposes; October 1 st for Federal Government begins Budget lines reflect commitments made in previous years To a large extent, current revenues and expenditures are the result of decisions made in prior years. Much of years budget is considered uncontrollable. Discretionary Fiscal Spending – elements of federal budget not determined by past legislative executive commitments Outlays for unemployment compensation and welfare benefits increase when the economy goes into recession. Increase in income transfers helps offset the loss of income due to recession. They act asa automatic stabilizers (income taxes are an automatic stabilizer) The size of the federal deficit/surplus is sensitive to expansion and contraction of the macro-economy.
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