Government and Fiscal Policy
Read this chapter to learn about how the government's fiscal actions influence aggregate demand. The chapter first introduces the components of the government's budget and then discusses discretionary fiscal policy and automatic stabilizers used to influence the economy. Some lags in the implementation of fiscal policy are identified and the concept of crowding out is introduced. Attempt the "Try It" exercises at the end of the section.
1. Government and the Economy
- Over the last 50 years, government purchases fell from about 20% of U.S. GDP to below 20%, but have been rising over the last decade.
- Transfer payment spending has risen sharply, both in absolute terms and as a percentage of real GDP since 1960.
- The bulk of federal revenues comes from income and payroll taxes. State and local revenues consist primarily of sales and property taxes.
- The government budget balance is the difference between government revenues and government expenditures.
- The national debt is the sum of all past federal deficits minus any surpluses.