Chapter 12 - Borrowed

Greater government expenditure or lower taxes *In a recession, the government should use fiscal stimulus—stepped-up government spending, tax cuts, and increased transfers—to eliminate unemployment and to increase aggregate demand.

Less government expenditure and higher taxes *Fiscal restraint such as tax hikes or spending cuts will cause the budget deficit to decrease or the budget to tend toward a surplus.

Aggregate demand curve shifts to the right. *Deficit spending occurs when government expenditures exceed tax revenues. Increased government spending or tax cuts, which create the need for deficit spending, will increase the aggregate demand.

An excess of government revenues over government expenditures in a given time period. *A budget surplus is the excess of government revenues over government expenditures in a given time period.

The government should spend less than it collects in tax revenues. *The only way to stop the growth of the national debt is to eliminate the budget deficits that create debt. To reduce the debt, budget surpluses would be needed.

October 1st. *The fiscal year (FY) is the 12-month period used for accounting purposes. It begins October 1st for the federal government.

Discretionary fiscal spending. *Discretionary fiscal spending is the elements of the federal budget not determined by past legislative or executive commitments.

Most of the current revenues and expenditures are the result of decisions made in prior years. *At present, uncontrollable spending decisions "locked in" by prior legislative commitments account for roughly 80 percent of the federal budget.

Decrease spending or increase taxes or both. *During a recession tax receipts automatically decrease while government expenditures automatically increase. Therefore in order to maintain a balanced budget, the government would have to increase taxes or cut government expenditures.

Increase spending during recessions and reduce spending during inflationary periods. *Automatic stabilizers are federal expenditure or revenue items that automatically respond counter cyclically to changes in national income. In other words, during a recession tax revenues will decrease and entitlement spending will increase without government intervention. During an expansion, tax revenues and will decline and expenditures will decrease automatically.

When the economy goes into recession. *The unemployment insurance program provides people who lose their jobs with some income. Each year's expenditure depends on how many workers lose their jobs and qualify for benefits. Welfare benefits also increase in response to worsened economic conditions. As more people lose jobs and use up their savings, they turn to welfare for help.

Fluctuations in economic activity. *Changes in the structural component result from policy changes; changes in the cyclical component result from changes in the economy.

The growth of the U.S. economy. *Most of the deficit reduction was due to automatic stabilizers that kicked in as GDP growth accelerated and the unemployment rate fell. As the economy continued to grow sharply, the unemployment rate fell to 4 percent. That surge in the economy increased tax revenues, reduced income transfers, and propelled the 1998 budget into surplus. It was primarily the economy, not the president or the Congress, that produced the first budget surplus in a generation.

Crowding out. *Crowding out is a reduction in private-sector borrowing (and spending) caused by increased government borrowing.

Runs a deficit and sells bonds to make up the difference. *Crowding out is a reduction in private-sector borrowing (and spending) caused by increased government borrowing. Increased borrowing occurs when the government runs a budget deficit. Selling bonds is how the government borrows money.

Crowding in. *Crowding in is an increase in private-sector borrowing (and spending) caused by decreased government borrowing.

U.S. Treasury. *Today the U.S. Treasury is the fiscal agent of the U.S. government. The Treasury collects tax revenues, signs checks for federal spending, and—when necessary—borrows funds to cover budget deficits.

Federal government agencies *Half of the U.S. debt is held by the U.S. government itself; 23 percent by Social Security 22 percent by federal agencies and 5 percent by the Federal Reserve. The private sector in the United States holds only 17 percent of the debt, and foreigners own about 28 percent.

Balance the economy (at full employment).

$-255

True

$85

Investing the money by purchasing corporate stock

The private sector will grow

False

22%

True