Unit 2 Macro: Fiscal Policy Glossary
A selection of economic terms linked to government fiscal policy
AAA credit rating
The best credit rating that can be given to a corporation’s or government’s bonds, effectively indicating that the risk of default is negligible
Both companies and governments can issue bonds when they need to borrow money
The rate of interest market investors demand when purchasing government bonds
When government spending > tax revenues. This leads to a rise in the level of debt
A tax on the profits made by companies
The amount of debt that a business or country has expressed as a share of GDP
High levels of debt leading to falling asset prices which makes debt harder to repay
Discretionary fiscal policy
Deliberate attempts to affect aggregate demand using changes in government spending, direct and indirect taxation and borrowing.
Disposable income adjusted for spending on essential bills such as fuel
Income after the effects of direct taxes and welfare benefits have been calculated
When government spending is being cut and/or taxation is being raised
Increased public spending and lower taxation, aimed at boosting economic activity
Another word for government bonds
The debt issued by a national government for example by the sale of bonds
The belief that the state can directly stimulate demand in a stagnating economy. For instance, by borrowing money for projects like roads, schools and hospitals.
Credibility means that economic agents such as businesses and consumers believe that a given policy is appropriate for a given economic situation and is likely to achieve the objectives or targets that have been set out. Credibility is widely assumed to be important in financial markets and can affect the cost of borrowing for governments in the capital markets and the value of a currency in the foreign exchange markets.
A tax that takes an increasing proportion of income as income rises
A tax that takes a smaller proportion of income as the taxpayer’s income rises
Debt issued by or guaranteed by a government
Also known as a financial transactions tax, the tax involves applying a small charge – of as little or less than 0.1 per cent – on foreign currency transactions to protect countries from exchange-rate volatility caused by short-term currency speculation