Fiscal Policy Vocabulary

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What is Fiscal Policy?

Back

The government’s use of taxation and spending to influence the economy

Answer explanation

Fiscal policy refers to the government's use of taxation and spending to influence the economy. It differs from monetary policy, which is managed by the Federal Reserve and focuses on the money supply.

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Expansionary Fiscal Policy

Back

A policy that increases government spending and/or cuts taxes to stimulate the economy

Answer explanation

Expansionary Fiscal Policy involves increasing government spending and/or cutting taxes to stimulate economic growth. This approach aims to boost demand and encourage investment, making the first answer choice correct.

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Contractionary Fiscal Policy

Back

A policy that reduces government spending and/or raises taxes to slow the economy

Answer explanation

Contractionary Fiscal Policy involves reducing government spending and/or increasing taxes to slow down economic activity, making the correct choice the one that describes this approach.

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What is the Federal Budget?

Back

The annual financial plan for the federal government’s revenues and expenditures

Answer explanation

The Federal Budget is the annual financial plan for the federal government’s revenues and expenditures, detailing how the government allocates funds for various programs and services.

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Federal Budget Surplus

Back

When the government collects more revenue than it spends

Answer explanation

A Federal Budget Surplus occurs when the government collects more revenue than it spends, indicating a positive financial balance. This is the opposite of a deficit, where spending exceeds revenue.

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Federal Budget Deficit

Back

When the government spends more than it collects in revenue

Answer explanation

A Federal Budget Deficit occurs when the government spends more than it collects in revenue, leading to a shortfall that must be financed through borrowing. This is the correct definition, distinguishing it from other options.

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What is the Federal Debt?

Back

The amount of money the government owes from past borrowing

Answer explanation

The Federal Debt refers to the total amount of money the government owes due to past borrowing. It is not about annual spending, individual tax debts, or money collected from states.

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What are Taxes?

Back

Payments made by individuals and businesses to the government to fund public services

Answer explanation

Taxes are mandatory payments made by individuals and businesses to the government, which are used to fund public services. This distinguishes them from voluntary donations or loans.

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Income Tax

Back

A tax on wages, salaries, and other earnings of individuals and businesses

Answer explanation

Income tax is specifically a tax on wages, salaries, and other earnings of individuals and businesses, making it distinct from sales tax, tariffs on imports, or property taxes.

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What is FICA?

Back

A tax that funds Social Security and Medicare programs

Answer explanation

FICA stands for the Federal Insurance Contributions Act, which imposes a tax specifically to fund Social Security and Medicare programs, making the first answer choice correct.