fiscal policy notes

fiscal policy notes - Topic 10: Principles of...

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Click to edit Master subtitle style FISCAL POLICY Dr. Fidel Gonzalez Department of Economics and Intl. Business Sam Houston State University Topic 10: Principles of Macroeconomics
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Fiscal Policy Federal Budget is composed of the annual government expenditures and revenue. If Government Revenue > Government Expenditure, then we have a Budget Surplus If Government Revenue < Government Expenditure, then we have a Budget Deficit If Government Revenue = Government Expenditure, then we have a Balanced Budget Federal Budget : the federal budget is the annual statement of the federal government’s expenditures and tax revenues. Fiscal policy is the use of the federal budget to achieve macroeconomic objectives, such as full employment, sustained long-term economic growth, and price level stability.
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Fiscal Policy: Government Revenue Government Revenue = Personal Income Taxes + Social Security Taxes + Corporate Income Taxes + Indirect Taxes + other Personal Income Taxes followed by Social Security Taxes are two largest sources of revenue for the government. In 2008, government revenue was $4,074 billion In 2009, government revenue was $3,726.9 billion In 2009 government revenue decreases because income in the economy also went down. There is less income to tax so government revenue decreases. Using our previous notation we get that in general: Government Revenue = Income x Tax Rate + Other Therefore during a recession incomes decrease which reduces government revenue. Also, during a recession government spending increasing since transfers to people also go up. Thus, recessions tend to increase budget deficits.
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Fiscal Policy: Government Expenditure Government Expenditure = Transfer Payments + Purchases of Goods and Services + Debt Interest Paid. Transfer payments are money payments from the government without any exchange of goods or services. They represent by far the largest share of government expenditures and they also continue to grow. Transfer payments includes Social Security Payments to retirees, Unemployment Benefits. In 2008, government expenditures were equal to $4,737.7billion. In 2009, government expenditures were equal to $4,998.8 billion. Hence, the government budget for 2008 and 2009 were: Government Budget 2008 = 4,074 - 4,737.7 = - 663.7 (Deficit of $663.7 billions) Government Budget 2009 = 3,726.9 - 4,998.8 = -1,271.9 (Deficit of $1,271.9 billions) Deficit increased 92% in one year.
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Fiscal Policy: Measurement of Government Budget Most of the time we want to measure the government budget, expenditures and revenue as percentage of the GDP. A surplus or deficit has to be compared with the overall size of the economy to see if it is big or small. When we compare the debt of a person we compare the size of the debt with the income to see the importance of this component. A $2 million deficit for Bill Gates is not much because his income is very high.
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fiscal policy notes - Topic 10: Principles of...

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