Fiscal Policy Flashcards
Four examples of government spending?
Capital spending - buying new schools
Current spending - ongoing costs like electricity for hospitals and schools
Transfers - benefits and pensions
Loan repayments
Define fiscal policy?
The manipulation of government spending and taxation to influence aggregate demand and achieve the macro economic objectives.
What is a fiscal deficit?
When Government spending is greater than taxation.
What is a fiscal surplus?
When government spending is less than taxation.
Five evaluative points on fiscal policy?
- Overstimulation of economy can lead to inflationary pressures
- Uncertainty on multiplier effect makes it difficult to predict exact response
- Dependent on size of G and T change
- Time lag very prominent
- Crowding out (gov demanding and borrowing more causes inflation and higher interest rates, therefore private sector struggle
What is reflationary fiscal policy (loose/expansiory) and when is it used?
When tax is decreased or government spending is increased.
Used in a recession to increase demand.
How does a change in government spending affect AD?
Government spending is a component of aggregate demand therefore a change in government spending will cause a change in aggregate demand.
How does the change in taxation affect consumption, investment and imports?
It affects C because if tax is lower then people have more disposable income so will spend more.
It affects I because if people are consuming less (fall in C) then there will be less incentive to invest since profits will be lower.
It affects M because if C increases due to tax decreasing, then inflation may occur, thus changing the X-M balance.
How does a change in government spending affect the LRAS/PPF?
If government spending decreases the price of any of the factors of production then the LRAS/PPF can increase due to more supply.
How can changes in taxation affect short run AS?
If taxation decreases for particular goods then SRAS can increase because the price of the product will fall for the consumer so there will be higher demand and therefore higher supply?????
What reflationary fiscal policy measures can the government take to increase demand?
-Decrease income tax -> more disposable Y
-Decrease indirect tax -> makes goods less expensive so consumers will buy more
-Increase welfare payments -> people with lower incomes will have more disposable Y.
-Building more infrastructure -> more jobs, higher incomes, so people have more
DY.
DECREASE TAX, INCREASE GOV SPENDING
Effects of reflationary fiscal policy?
Fall in unemployment
Increase in inflation/prices
Increase in economic growth
CAN BE EXPLAINED WITH AD AS DIAGRAM
When would reflationary fiscal policy be used?
Negative output gap Low economic growth Recession High unemployment present Low inflation
Why is reflationary FP used?
To increase AD
When is deflationary FP used?
In a boom/positive output gap/too high inflation
