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Long Run Effects of Fiscal Policy definitions

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  • Budget Deficit
    Occurs when government expenditures exceed tax revenues, requiring borrowing to finance the gap and impacting long-term economic growth.
  • Government Debt
    Represents accumulated borrowing from persistent deficits, leading to future obligations for interest payments and fiscal adjustments.
  • Crowding Out Effect
    Describes how government borrowing increases competition for loanable funds, raising interest rates and reducing private investment.
  • Loanable Funds
    Refers to the pool of money available for borrowing by firms and governments, influencing investment and interest rates.
  • Interest Rate
    Acts as the price of borrowing money, rising when demand for funds increases, and affecting investment decisions and economic growth.
  • Investment Spending
    Involves expenditures on capital goods like factories and equipment, crucial for long-term economic expansion.
  • Long Run Growth
    Signifies sustained increases in an economy’s productive capacity, often hindered by reduced investment due to fiscal imbalances.
  • Interest Payments
    Obligations arising from government debt, which place pressure on future budgets and may require fiscal tightening.
  • Tax Wedge
    Measures the gap between earnings before and after taxes, directly impacting disposable income and consumption.
  • Disposable Income
    Represents earnings remaining after taxes, determining the ability of households to consume or save.
  • Consumption
    Reflects household spending on goods and services, influenced by changes in disposable income and tax policy.
  • Corporate Taxes
    Levies on business profits, where lower rates can boost investment by increasing after-tax returns.
  • Capital Gains
    Profits from the sale of assets, with taxation affecting incentives to save and invest.
  • Balanced Budget
    Achieved when government spending matches tax revenues, preventing persistent deficits and excessive debt accumulation.