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Chapter 11 government taxing and spending

1. Key terms – matching and translation.

Read aloud the key term and its definition so that they make up a single sentence. (Remember about the agreement between the subject and the predicate!). Translate the sentences you have arrived at from English into Russian.

1 fiscal policy	Deliberate changes in spending and taxes for stabilization policy.
2 fiscal drag	Retards growth in Aggregate Expenditures
3 automatic stabilizers	Examples of nondiscretionary fiscal policy
4 balanced budget multiplier	Always equals one.
5 discretionary fiscal policy	The use of government spending and tax policies to stimulate or contract economic activity to offset cyclical fluctuations.
6 Laffer curve	Higher tax rates may either raise or lower government revenues.
7 high tax rates	Keynesians see as dampening spending, while new classical economists emphasize the destructive effects of production incentives.
8 government spending and transfers	- (MPC/MPS).
9 structural deficit	Keynesians perceive as bolstering spending, but new classical economists worry about disincentive effects on production.
10 autonomous tax multiplier	Occurs if the economy has excessive idle capacity.
11 cyclical deficit	Tax revenues minus government outlays if the economy were producing at its capacity.

2 Text translation.

Translate the text from English into Russian in writing paying particular attention to the translation of the economic terms in bold as well as words and phrases relevant to the subject of the text. Read out your translation in class and introduce the necessary corrections.

Government taxing and spending

Chapter Objectives

After you have read and studied this chapter you should be able to differentiate between discretionary automatic fiscal policy; explain how the autonomous spending, tax, and balanced-budget multipliers operate; distinguish between structural and cyclical deficits; and identify differences between Keynesian and new classical economic fiscal policies.

Chapter Review: Key Points

1. Keynesian fiscal policy is the use of federal spending and tax policies to stimulate or contract Aggregate Spending and economic activity to offset cyclical fluctuations. Classical (supply-side) fiscal policies rely on low tax rates and minimal government spending to allow Aggregate Supply to grow.

2. Discretionary fiscal policy consists of deliberate changes in federal government spending and taxation for stabilization purposes. Without congressional action automatic stabilizers such as corporate and personal income taxes and various transfer programs cause changes in spending and taxation as economic conditions change.

3. Increases in government spending increase Aggregate Expenditure and National Income through the multiplier process in the same way as changes in investment or autonomous consumer spending.

4. Changes in net tax revenues (tax revenues minus transfer payments) affect Aggregate Spending differently than changes in government spending. Changes in net taxes directly affect disposable income and, therefore, saving. These effects are transmitted into spending through the autonomous tax multiplier (∆Y/∆T = 1 - 1/mps), which is weaker than the spending multiplier.

5. In a Keynesian depression, the balanced-budget multiplier equals one, suggesting that equal increases (decreases) in government spending and taxes will increase (decrease) Aggregate Spending and equilibrium income by an equal amount. This result follows from the fact that the autonomous tax multiplier is one minus the autonomous spending multiplier.

6. Automatic stabilizers tend to cushion the economy. When income fails, automatic stabilizers keep the level of disposable income from falling as rapidly as income. Our progressive income tax causes tax collections to fall proportionally faster when income is falling and to increase proportionally faster when income is rising.

7. Built-in stabilizers can pose the problem of fiscal drug. When potential income is rising, automatic stabilizers brake the economy and slow the rate of growth.

8. The structural deficit is an estimate of the deficit that would be generated at full employment under existing tax and expenditure structures. This is a way to estimate the expansionary or contractionary influence of any tax and expenditure mix.

9. The cyclical deficit is attributable to business conditions. As unemployment grows, the cyclical deficit grows, and vice versa.

10. The Laffer curve indicates that high tax rates may impose such large disincentives to productive effort that Aggregate Supply and tax revenues are both restricted.

11. Marginal tax rates are the percentage taxes applied to small gains in additional income.