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The
US federal government's taxation and spending policies affect the nation's
overall level of employment, output and prices, what economists call
"macroeconomics variables." However, many government taxation
and spending activities are undertaken for other reasons as well. Government
expenditures for national defense, human services, and other purposes
are made to meet specific objectives and not primarily because of their
fiscal policy effects. Other important objectives must be merged with
the goals of full employment, price stability, and economic growth.
Therefore, government programs may have contradictory effects upon unemployment
and inflation. Understanding these effects is complicated also by the
time lags that occur before action is taken pursuant to a specific policy
begins to affect the overall levels of employment, output, and prices.
- In
spite of these difficulties, policy makers and the general public
continue to examine and debate the overall stabilization effects of
public policy actions, because the consequences are so important.
Students should understand the role of conflicting objectives and
the limitations on the effectiveness of economic stabilization policies
in order to develop realistic expectations about what can be accomplished
with taxation, spending and monetary policies.
- Fiscal
policies are decisions to change spending and tax levels by the federal
government. These decisions are adopted to influence national levels
of output, employment, prices.
- In
the short run, increasing federal spending and/or reducing taxes can
promote more employment and output, but these policies also put upward
pressure on the price level and interest rates. Decreased federal
spending and/or increased taxes tend to lower price levels and interest
rates, but they reduce employment and output levels in the short run.
- In
the long run, the interest rate effects of fiscal policies lead to
changes in private investment spending by businesses and individuals
that partially, if not entirely, offset the output and employment
effects of an expansionary fiscal policy. This phenomenon is called
crowding out.
- The
federal government's annual budget is balanced when its revenues from
taxes and user fees equal its expenditures. The government runs a
budget deficit when its expenditures exceed its revenues. The government
runs a surplus when its revenues exceed its expenditures.
- When
the government runs a deficit, it must borrow from individuals, corporations,
or financial institutions to finance that deficit.
- The
national debt is the total amount of money the federal government
owes. This is the accumulated sum of its annual deficits and surpluses.
The government pays interest on the money it borrows to finance the
national debt.
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