Fiscal Policy Flashcards
(9 cards)
What is Fiscal Policy?
How government spending and taxation levels influence the levels demand in an economy
What is the difference between current, capital and transfer of payments government spending?
Current = day-to-day spending (e.g. salaries), Capital = long-term investment (e.g. roads, schools),
ToP = Welfare Payments
Advantages Of High Government Debts
Advantages:
“During a recession, significant spare capacity means increased government borrowing injects demand into the circular flow. This raises consumption, encouraging firms to utilise idle resources to meet higher demand, thus increasing real output and stimulating economic growth without causing inflationary pressure.”
Can play a stabilising factor (automatic stabilisers)
Disadvantages Of High Government Debts
Higher Interest Payments (Opp Cost of Investing in Education and Healthcare)
Crowding Out (Increased demand for loanable funds increases interest rates)
Impact of Expansionary Fiscal Policy on Macro Objectives:
High Growth ✅
Low Inflation ❌
Low Unemployment ✅
Balance Of Payments Surplus ❌
Inequality (Depends)
Sustainability ❌
Low Debt ❌
When is expansionary fiscal policy used?
During a Recession to increase demand for goods and services, causing firms to utilise spare capacity to produce more with limited inflationary pressure
Examples Of Expansionary Fiscal Policy
Reducing Taxation and/or Increasing Government Spending
Advantages Of A High Government Debt?
Is sustainable if GDP growth > Debt Growth
High Levels Of Spending within the economy
Debt may be high due to capital expansion projects with Long Run benefits
Disadvantages Of A High Government Debt
Inflationary impact if in positive output gap (as government is straining the supply of resources in an economy)
Crowding Out Private Investment can reduce firm expenditure on capital goods, harming future supply growth
