5.3 Public Sector Finances

Question 1

What are automatic stabilisers?

Answer 1

Natural changes in fiscal policy as an economy moves through the trade cycle

Question 2

What is discretionary fiscal policy?

Answer 2

Deliberate changes in fiscal policy to make certain economic changes

Question 3

What is a cyclical deficit?

Answer 3

The size of the fiscal deficit is influenced by the current state of the economy

Question 4

What is a structural deficit?

Answer 4

The size of the fiscal deficit is not related to the state of the economy

Question 5

Factors influencing size of fiscal deficits?

Answer 5

Short-run (cyclical):
- Rate of unemployment
- Consumer spending
- Automatic stabilisers

Long-run (structural):
- Size of welfare state
- Demographic factors
- Size of tax base

Question 6

Arguments against rising national debt?

Answer 6

1) Interest payments
2) Opportunity cost
3) Likely to cause higher taxes

Question 7

Arguments for rising national debt + govt borrowing?

Answer 7

1) Extra state spending
2) Higher fiscal deficit needed to end recession