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Long Run Effects of Fiscal Policy definitions

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  • Budget Deficit
    Occurs when government spending exceeds tax revenue, requiring borrowing and leading to higher interest rates and reduced investment.
  • Crowding Out Effect
    Government borrowing increases demand for loanable funds, raising interest rates and reducing private investment.
  • Interest Rate
    Represents the cost of borrowing money, influenced by government borrowing and supply of loanable funds.
  • Investment Spending
    Funds allocated by firms for capital goods like factories and equipment, sensitive to changes in interest rates.
  • Long Run Growth
    Sustained increase in an economy’s productive capacity, dependent on capital investment and fiscal policy.
  • Disposable Income
    Amount of income available to households after taxes, affecting consumption and savings.
  • Tax Wedge
    Difference between pretax earnings and post-tax income, impacting incentives for work and investment.
  • Loanable Funds
    Pool of savings available for borrowing by firms and government, determining interest rates.
  • Capital Investment
    Expenditure on assets like factories and equipment, crucial for economic expansion and growth.
  • Balanced Budget
    Situation where government spending equals tax revenue, preventing future tax hikes or spending cuts.
  • Corporate Taxes
    Levies on business profits, influencing investment decisions and returns for firms.
  • Capital Gains
    Profits from the sale of assets, affected by tax policy and influencing savings and investment.
  • Dividends
    Payments to shareholders from corporate profits, subject to taxation and impacting household savings.
  • Macroeconomic Stability
    Condition where fiscal policy maintains steady growth, low inflation, and balanced government finances.
  • Market Equilibrium
    State where supply and demand for loanable funds are balanced, determining the prevailing interest rate.