sg10 - 10 Fiscal Policy Chapter Summary In 2005, the...

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10 Fiscal Policy Chapter Summary In 2005, the federal government budget deficit was $331 billion. In other words, the U.S. government spent $331 billion more than its revenue from taxes. In this chapter, we study how governments can use fiscal policy —changes in taxes and spending that affect the level of GDP—to stabilize the economy. We explore the logic of fiscal policy and explain why changes in government spending and taxation can, in principle, stabilize the economy. The chapter also provides an overview of spending and taxation by the federal government. These are essentially the tools that the government uses to implement its fiscal policies. Here are the main points of the chapter: Increases in government spending or decreases in taxes will increase aggregate demand. Decreases in government spending or increases in taxes will decrease aggregate demand. Because of the multiplier, the total shift in the aggregate demand curve will be larger than the initial shift. Policy makers need to take the multiplier into account as they formulate policy. Both inside lags (the time it takes to formulate policy) and outside lags (the time it takes the policy to work) limit the effectiveness of active fiscal policy. The largest component of federal spending is entitlements and mandatory programs. The largest components of federal revenues are income taxes and social insurance contributions collected from individuals. Government deficits act as an automatic stabilizer that helps to stabilize the economy in the short run. In the short run, fiscal policy actions taken to combat a recession will increase the deficit; in the long run, deficits are a concern because they may lead to crowding out of investment spending. Active fiscal policy has been periodically used in the United States to stimulate the economy; at other times, concerns about deficits have limited the use of fiscal policy. Applying the Concepts After reading this chapter, you should be able to answer these three key questions: 1. Why are the United States and many other countries facing dramatically increasing costs for their government programs? 2. How does the U.S. government make short- and long-term budget projections? 3. How much did the 2001 tax cuts stimulate consumer spending?
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Fiscal Policy 143 ± Study Tip This chapter is primarily informational. As such, you should take time to really study the key terms at the end of the chapter. Outlining the chapter will also help you summarize the major points. Lastly, review the “Applying the Concepts” questions and keep them in mind as you read the textbook. This will give real-life applications of the concepts you are studying. 10.1 The Role of Fiscal Policy
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sg10 - 10 Fiscal Policy Chapter Summary In 2005, the...

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