MAcro CHAPTER 5.4:

CHAPTER SUMMARY

This is largely a vocabulary chapter, with the following key vocab:

• Government Expenditure: spending

• Government Revenue: money coming in (usually via taxes)

• Federal Budget: The government's prediction/plan for its total revenue and expenditure in a given year

• Budget Surplus: When government revenues are greater than government expenditures

• Budget Deficit: When government expenditures are greater than government revenues

• Balanced Budget: When government revenues = government expenditures

• National Debt: The total amount of money owed by the government (total historical expenditures - total historical revenue)

• Fiscal Stimulus: Using expansionary fiscal policy (lowering taxes or raising spending & transfer payments)

• Fiscal Restraint: Using contractionary fiscal policy (raising taxes or lowering spending & transfer payments)

Governments have to make difficult decisions about how to balance their debt and the needs of citizens. For example, if your government currently carries $10B in debt, but the COVID pandemic just hit, should you spend more money to help your citizens, increasing your debt? Or should you prioritize a balanced budget? Borrowing and spending more money now will mean larger interest payments later, but will also help your citizens get through tough times.

On the flip side, sometimes the economy is doing very well, and the government also has a national surplus. Should they spend this money because they have it, or impound it (hold onto it) until the country really needs the money? Should they lower taxes to encourage further economic growth?

These are normative economic questions that you will not need to answer, because there is not a correct answer. However, it is important to understand the implications of these government decisions.

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EXTENSION