fiscal policy Flashcards
what is fiscal policy
fiscal policy refers to the use of government spending and taxation to influence the economic environment
How much money has Rishi Sunak invested in education.
£96 billion has been used for tutoring and catch up lessons for the work missed out in lockdown
What are the two benefits in a fall in income tax?
- Increased incentive to work
- Greater disposable incomes leading to greater consumption.
- Trickle down effect- as those high income earner earn more the may chose to invest
The activity of making, purchasing and selling of goods and services
reasons for an expansionary fiscal policy
- boost growth
- reduce unemployment
- redistribute income
reasons for deflationary fiscal policy
- reduce inflation
- reduce budget deficit
- reduced current account deficit
how can a deflationary fiscal policy cause a current account surplus
with increase taxes incomes are likely to fall and people are less likely to import as a result
what is a budget deficit
the amount the the government has to borrow each year as a result of G spending> G Income
what is national debt
the total amount of money that the government owes to private sector and other purchasers of UK gilts.
negatives of running a budget deficit
(crowding out analysis
when the government runs a high budget deficit for a long time and needs to borrow money it will issue more government bonds
with an increase in supply the market price for bonds falls and the yield may exceed 1% (current bank rate)
The government may finance their debt in the short term
But as banks chose to buy bonds therefore decreasing their supply of money falls meaning less loans can be lent out at a lower interest rate. This may cause interest rates to rise and investment may fall as a result.
draw the crowding out diagram
when may crowding out be particularly harmful
when recovering from a recession such as covid.
when may operating on a budget deficit be ok
(structural). the golden rule says the government is able to borrow as long as it funds capital spending such as investment on the HNS or the HS2
as it improves the quality and quantity of the workforce therefore shifting out lras
(cyclical). when avoiding deflation and the real wage unemployment associated with it (hysteresis)
how to calculate the yield on bonds
yield= (coupon/market price)X100
Cooper is always on top
why may crowding out be particularly likely in the UK
as the bank rate is currently at 0.75% many banks will chose to invest in bonds which have a higher coupon