Key Terms

automatic stabilizers: tax and spending rules that have the effect of slowing down the rate of decrease in aggregate demand when the economy slows down and restraining aggregate demand when the economy speeds up, without any additional change in legislation

balanced budget: when government spending and taxes are equal

budget deficit: when the federal government spends more money than it receives in taxes in a given year

budget surplus: when the government receives more money in taxes than it spends in a year

contractionary fiscal policy: fiscal policy that decreases the level of aggregate demand, either through cuts in government spending or increases in taxes

corporate income tax: a tax imposed on corporate profits

crowding out: federal spending and borrowing causes interest rates to rise and business investment to fall

discretionary fiscal policy: the government passes a new law that explicitly changes overall tax or spending levels with the intent of influencing the level of overall economic activity

estate and gift tax: a tax on people who pass assets to the next generation—either after death or during life in the form of gifts

excise tax: a tax on a specific good—on gasoline, tobacco, and alcohol

expansionary fiscal policy: fiscal policy that increases the level of aggregate demand, either through increases in government spending or cuts in taxes

implementation lag: the time it takes for the funds relating to fiscal policy to be dispersed to the appropriate agencies to implement the programs

individual income tax: a tax based on the income, of all forms, received by individuals

legislative lag: the time it takes to get a fiscal policy bill passed

marginal tax rates: or the tax that must be paid on all yearly income

national debt: the total accumulated amount the government has borrowed, over time, and not yet paid back

payroll tax: a tax based on the pay received from employers; the taxes provide funds for Social Security and Medicare

progressive tax: a tax that collects a greater share of income from those with high incomes than from those with lower incomes

proportional tax: a tax that is a flat percentage of income earned, regardless of level of income

recognition lag: the time it takes to determine that a recession has occurred

regressive tax: a tax in which people with higher incomes pay a smaller share of their income in tax

standardized employment budget: the budget deficit or surplus in any given year adjusted for what it would have been if the economy were producing at potential GDP

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