Fiscal Policy Flashcards

1
Q

What is fiscal policy?

A

Involves changes in government spending, taxation and the level of government borrowing to help achieve some of the micro and macroeconomic objectives of the government.

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2
Q

The tools of fiscal policy

A
  • An increase in government spending can have multiplier effects, enhancing the impacts of aggregate demand
  • Reducing the level of taxation can also affect aggregate demand
  • The overall impact of fiscal changes depends on the balance between government expenditure and revenue
  • If government expenditure > revenue, the government runs a budget deficit
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3
Q

Fiscal policy

A

Involves changes in government spending, taxation and the level of government borrowing to help achieve the macroeconomic objectives of the government.

  • State sector spending is also known as public sector spending
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4
Q

Main instruments of fiscal policy

A
  • Government spending
  • Taxation
  • Fiscal balance (deficit or surplus)
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5
Q

Instruments of fiscal policy

A
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6
Q

Government spending

A

Also known as the public expenditure, refers to the money that a government allocates to fund various state provided programmes and public services. These expenditures are typically financed through taxes and government borrowing (such as issuing bonds)

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7
Q

The main types of government spending

A
  • Welfare spending (Social transfers) = transfer payments, e.g. benefits
  • Public services (Public and merit goods) = recurring spending, e.g. police
  • State investment (capital investment projects) = investment projects, e.g. new bridge
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8
Q

Difference between current and capital spending

A

Current government spending - on providing public services. - e.g. salaries of NHS employees, Army logistic supplies, Road management budget

Capital spending - new public infrastructure - e.g. Construction of new motorways and bridges, Flood defence schemes, Defence schemes

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9
Q

Significance of government spending

A
  • Is a key component of aggregate demand
  • Helps to stabilise demand in a recession
  • Has a regional economic impact
  • Important in providing public & merit goods
  • Driver of long run growth
  • Can help achiever greater equity in society
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10
Q

Taxation

A

Taxation is the process by which governments collect revenue form individuals, businesses, and other entities to finance public services, infrastructure, and various government functions

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11
Q

What are the main reasons for taxation?

A
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12
Q

Balanced budget

A

Government spending = taxation (G = T)

  • AD stays the same
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13
Q

Budget deficit (good thing)

A

Government spending > taxation (G > T)

  • Greater injections (G) than withdrawals (T)
  • AD increases
  • = Economic growth + unemployment decreases
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14
Q

Budget surplus (bad thing)

A

Government spending < Taxation (G < T)

  • Greater withdrawals than injections
  • AD decreases
  • Decrease in RNO
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15
Q

How does a budget deficit occur?

A
  • Occurs when public sector spending exceeds revenue
  • The budget deficit is financed by public sector borrowing
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16
Q

Expansionary fiscal policy

A
17
Q

Types of government spending

A

Current (SR) - day to day
Capital (LR) - infrastructure
Transfers - reduce inequality

18
Q

Key roles of fiscal policy

A