Chapter 13: Problem 1

Define: a. fiscal policy b. expansionary fiscal policy c. contractionary fiscal policy d. crowding out e. crowding in f. after-tax income g. Laffer curve

Short Answer

Expert verified

Fiscal policy is the use of government taxation and expenditure to influence the economy. Expansionary fiscal policy stimulates economic growth by increasing government spending or reducing taxes. Contractionary fiscal policy reduces fiscal deficits by increasing taxes or decreasing government expenditure. Crowding out occurs when increased interest rates lead to a reduction in private investment while crowding in makes a market sector attractive to private investors due to increased government involvement. After-tax income is net income after all tax deductions. The Laffer Curve shows the relationship between tax rates and the amount of tax revenue collected by the government.

Step by step solution

Define Fiscal Policy

Fiscal policy refers to the use of government revenue collection (taxation) and expenditure (spending) to influence a country's economy.

Define Expansionary Fiscal Policy

An expansionary fiscal policy is a policy that involves government measures, specifically increasing expenditure and/or reducing taxes, to stimulate economic growth.

Define Contractionary Fiscal Policy

A contractionary fiscal policy is a type of policy that is laid out by the government to reduce fiscal deficits. This policy involves increasing taxes, decreasing government expenditures or both.

Define Crowding Out

Crowding out is a situation when increased interest rates lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending.

Define Crowding In

Crowding in is an economic theory stipulating that the increased government involvement in a market sector makes it more attractive to private investors.

Define After-Tax Income

After-tax income is the net income after the deduction of all federal, state, and withholding taxes.

Define Laffer Curve

The Laffer Curve is a theory in economics that shows a relationship between tax rates and the amount of tax revenue collected by governments. The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government.

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