3.6 - Government Management of the Economy - Fiscal Policy Flashcards
(11 cards)
Define fiscal policy.
fiscal policy is where the government uses taxation and government expenditure to achieve its economic objectives.
List the 5 objectives of fiscal policy.
- Sustainable economic growth
- Low unemployment
- External balance on the current account balance of payments
- Low inflation or price stability
- Achievement of a more equitable distribution of income
List the 4 sources of government revenue.
- Direct taxation
- Indirect taxation
- Profit from state run organizations
- Asset sales (government privatizes industries)
Elaborate on government borrowing.
Government borrowing is an important part of fiscal policy because it is needed when expenditure is greater than taxation.
This is financed by selling bonds in the financial markets.
Define budget deficit.
On year of government borrowing.
Define national debt.
Accumulated government borrowing over time.
List the three types of government expenditure.
- Current expenditure - day to day such as wages.
- Capital expenditure - Projects financed by the government.
- Transfer expenditure - welfare payments.
Benefits of expansionary fiscal policy
- Appropriate for demand deficient unemployment in recession
- Less time lag
- Directly impact AD compared to monetary
- Doesnt affect exchange rate like monetary policy
- Specific target
Weaknesses of expansionary fiscal policy
- Increase national debt
- Crowding out
- If consumer confidence is low, they may just save the untaxed money
- No flexibility
- Rise in inflation
Benefits of contractionary fiscal policy
- More direct affect on AD
- Less time lag
- Interest rate unaffected
- Targeted more specifically at certain sectors
Weaknesses of contractionary fiscal policy
- More tax is bad for motivation
- Adds to business costs and creates unemployment + cost push inflation
- Austerity has a bad affect on society
- Not flexible
- Reduced rates of economic growth
