1. ECO 1003 Handouts for Chapters 14-16-18

2. Chapter 14 Debts and Deficits: What’s a Trillion More or Less? Budget deficit The excess of government spending over government revenues during a given time period Public Debt The amount of money owed by a government to its creditors Interagency borrowings Loans from one part of the government to another

3. Chapter 14 Debts and Deficits: What’s a Trillion More or Less? Liabilities Amounts owned; the legal claims against an individual or against an institution by those who are not owners of that institution Unfunded taxpayer liabilities Obligations of taxpayers for which no specific debt instruments have been issued

4. Chapter 16 Soak the Rich Regressive tax system A set of rules that result in the collection of a smaller share of income as taxes when income rises Progressive tax system A set of rules that result in the collection of a larger share of income as taxes when income rises Proportional tax system A set of rules that result in the collection of an unchanging share of income as income changes

5. Chapter 16 Soak the Rich Median income The income that separates the higher-income half of the population from the lower-income half Tax rebate A return of some previously paid taxes Earned income tax credit A tax program that permits negative taxes, that is, that provides for payments to people (instead of collecting taxes from them) if their incomes go below a predetermined level

6. Chapter 18 The Hazards of High Taxes Static economic analysis A mode of analysis that assumes for simplicity that people do not change their behavior when incentives change Dynamic economic analysis A mode of analysis that recognizes that people respond to changes in incentives and that takes these responses into account when evaluating the effects of policies

7. Chapter 18 The Hazards of High Taxes Tax rate The percentage of income that must be paid in taxes Marginal tax rate The percentage of the last dollar earned that is paid in taxes Tax evasion The deliberate failure to pay taxes, usually by making a false report Negative tax A payment from the government to an individual that is based on the individual’s income

8. The Government and Fiscal Policy Government can affect the macroeconomy through two policy channels: fiscal policy The government’s spending and taxing policies Fisc referring to the treasury of a government monetary policy The behavior of the Central Bank concerning the nation’s money supply

9. The Government and Fiscal Policy Fiscal policy: Policies concerning government purchases of goods and services Policies concerning taxes Policies concerning transfer payments (such as social security benefits) discretionary fiscal policy Changes in taxes or spending that are the result of deliberate changes in government policy

10. Government in the Economy GOVERNMENT PURCHASES (G), NET TAXES (T), AND DISPOSABLE INCOME (Y D ) net taxes (T) Taxes paid by firms and households to the government minus transfer payments made to households by the government

11. Government in the Economy disposable, or after-tax, income (Y d ) Total income minus net taxes: Y − T disposable income ≡ total income − net taxes Yd ≡ Y − T

12. Government in the Economy The disposable income (Y d ) of households must end up as either consumption or saving (S) Y d ≡C+S As disposable income is aggregate income (Y) minus taxes (T) Y-T≡C+S Y≡C+S+T

13. Government in the Economy When government enters the picture, the aggregate income identity gets cut into three pieces: Government takes a part (net taxes T) Households divide the rest between consumption (C) and saving (S) Planned aggregate expenditure (AE) is the sum of consumption spending by households (C), investment by business firms (I) and government purchases of goods and services (G) AE≡C+I+G

14. Government in the Economy budget deficit The difference between what a government spends and what it collects in taxes in a given period: G − T budget deficit ≡ G − T If G>T government must borrow from the public to finance the deficit If G<T government is spending less than it is collecting in taxes, the government is running a surplus

15. Government in the Economy Adding Taxes to the Consumption Function To modify our aggregate consumption function to incorporate disposable income instead of before- tax income, instead of C = a + bY, we write C = a + bY d C = a + b(Y − T) Our consumption function now has consumption depending on disposable income instead of before-tax income