Chapter 47 Flashcards
(18 cards)
What can expansionary fiscal policy do?
Increase actual economic growth and reduce cyclical unemployment.
However higher ag can cause demand pull inflation and increase a deficit on the current account and balance of payments
What can contractionary fiscal policy do?
May help give achieve lower AD can cause lower inflation and balance on current account of balance of payments.
Might however cause higher cyclical unemployment and lower actual economic growth
Crowding out?
Idea that public sector spending will replace private sector spending
Crowding in?
Higher public sector spending will increase priv sector spending
Problems that can occur with fiscal policies?
Unexpected response
Time lags
Difficulty reversing an increase in gov spending
Time lags?
Risk that fiscal policy might act to reinforce buisnesss cycle than counter it.
During a recession it might take too long for gov to decide on policy and for household to react to policy’s. By the time the changes have been made an economic boom might occur
Dif in reversing an increase in gov spending
If giv makes long term commitment they still have to pay off for decades
Laffer curve?
Curve showing tax revenue rising at first as the tax rate is increasing and then falling beyond a certain rate
What does laffer curve do
Shows how gov can make the most tax revenue and which rate to tax without being counterproductive
What policy’s in fiscal policy’s?
Tax cut or increase or gov spending increase or decrease
What bad about Monetary policies time lags?
Take time but faster than fiscal because changing interest rates is faster than draw up Chang win tax
What are unexpected responses
High interest rates might not encourage investment and consumption
How can other countries affect monetary policy
A central banks ability to change interest rates is limited by other countries and how they set their interest rates.
E.g
If other countries have low interest rates while lux wants to raise to discourage borrowing then firms might just borrow from abroad
What are supply side policies divided into
Market based ones and interventionist ones
What are market based supply side policies
Tools that increase role of market forces.
Cuts in direct tax ,cuts in unemployment benefit, privatisation, deregulation and labour market reforms
What are each tools aimed to do
Cuts in direct tax and unemployment benefit seek to raise aggregate supply by increasing incentives to work and be entrepreneurial. Privatisation, deregulation and labour market reforms are aimed at raising aggregate supply by increasing competition and reducing the cost and effort involved in complying with government rules and regulations.
What are examples of interventionist supply side policies
Spending on education, infrastrucure and tech improvement
