Fiscal Policy and Public Debt Flashcards
(165 cards)
1
Q
long run d
A
observe economy over a long period of time (not all factors flexible)
2
Q
short run d
A
3-6 months maybe even year, deviation from long run value
3
Q
brief history of fiscal policy for these periods: before 1930 stock market crash/great depression before 2007 global financial crisis
A
before 1930 - laissez faire approach (policy of leaving things to take their own course),
stock market crash - policymakers push for governments to play more proactive role,
before 2007 - countries scaled back size and function of government,
global financial crisis - many countries returned to more active fiscal policy
4
Q
fiscal policy d
A
governments use spending and taxing powers to promote stable and sustainable growth
5
Q
expansionary fiscal policy d
A
policy that is expected to increase aggregate demand, tax reductions and/or increase in government expenditure
6
Q
contractionary fiscal policy d
A
policy that is expected to reduce aggregate demand, tax increases and/or reductions in government expenditure
7
Q
what is Keynes’ basic theory (not technically worded)
A
demand side is everything basically,
governments need to spend when recession
8
Q
what was Hayek’s basic theory
A
private investment, rather than government spending would promote sustainable economic growth
9
Q
what were the two bits of fiscal policy during the financial crisis
A
economic stimulus act of 2008 (bush),
american recovery and reinvestment act 2009 (obama)
10
Q
when was the economic stimulus act and who implemented it
A
2008,
Bush
11
Q
when was the american recovery and reinvestment act and who implemented it
A
2009,
Obama
12
Q
tell me about the economic stimulus act of 2008
A
bush, more than $100 billion, tax rebates (more than 70 million), american households receive $950 tax rebate, business investment tax incentives
13
Q
tell me about the american recovery and reinvestment act 2009
A
obama, $787 billion until 2019 for 10 years, tax credit up to $800 per family, business investment tax incentives, aid to unemployed, government spending on infrastructure and other investments
14
Q
public good d
A
g + s that are non-excludable and non-rival
15
Q
government consumption d
A
provision of public goods such as education and health care
16
Q
government investment d
A
investment by the government in schools, hospitals and transport systems
17
Q
government transfers d
A
payment by the government for which there is nothing received in return, pensions, child allowances, social assistance
18
Q
what does G stand for
A
government consumption and investment
19
Q
what does T stand for
A
taxes (minus transfers)
20
Q
what does D stand for
A
net government debt
21
Q
G=T
A
balance
22
Q
G>T
A
budget deficit (primary deficit)
23
Q
G
A
budget surplus
24
Q
due to the financial crisis, what has the budget balance been a lot recently (in terms of g and t)
A
G>T
25
budget deficit as a percentage of gdp equation
(G-T)/Y *100
26
automatic stabilisers d
features of the structure of modern government budgets, particularly income tax and welfare spending, that act to dampen fluctuations in real GDP
27
example of automatic stabilisers (2 examples)
Y down, unemployment up, spend more on unemployment benefits G up,
Y down, tax revenue down because less working
28
what is a sort of timeline of what could happen if the government has a budget deficit
deficit, (decrease expenditure or increase taxes(doesn't do this because unpopular with voters)) or (borrow domestic or foreign), accumulation of borrowing, debt
29
how does a government borrow money from domestic or foreign markets
by issuing bonds in return for a given rate of interest
30
what is the condition for the deficit to be unsustainable
r > g,
| interest rate > growth rate
31
explain brief timeline of latin america debt crisis
booming gdp per capita 1962 - 1979,
| fall from 1979 - 1984
32
explain the petrodollar recycling diagram
petrodollars (middle east) deposit money in us bank such as citibank, citibank make flexible loans to latin america, latin america buy more oil from middle east (consumption not investment so doesn't bring rate of return)
33
what happened as a result of the 1973 yom kippur war
oil embargo by opec countries punishing the us for involvement, this increased the price of oil dramatically in the us (because had to get from elsewhere), led to inflation in the us
34
how did the petrodollars diagram lead to the latin american debt crisis
inflation in us high because of oil prices (because of embargo due to yom kippur),
increased us interest rate (paul volcker chairman of federal reserve),
latin america had lots of flexible loans from us banks so couldn't pay back loans due to higher rates
35
what was another thing that caused the latin american debt crisis
the fact that the loans from the us banks were being used for consumption rather than investment so not giving any rate of return
36
who defaulted on their loans in 1982, how much was it and what crisis was this related to
mexico 1982 default on loans $80 billion,
| latin american debt crisis
37
what greek letter is inflation
π
38
what was some outcomes of the latin american debt crisis
paul volcker could either reduce i or loan more money to la,
didn't want to reduce i because would return the us to high inflation rate,
IMF and world bank loaned money,
only pay back the principal (interest) not the actual loan
39
sovereign debt (public debt or national debt) d
how much a coutry's government owes to outside creditors
40
what are some factors that sovereign debt can arise from
lack of mechanism/institutions to prevent build up of macroeconomic and fiscal imbalances,
lack of common eurozone institutions to effectively absorb shocks
41
what happened to periphery nations in the eu at the start
joining the eurozone, big capital flows (such as bank loans) from ez core nations like germany to periphery nations like ireland and portugal,
cheap credit used to finance consumption rather than investment,
periphery became dependent on foreign lender to cover savings - investment gap
42
name some eurozone core and periphery locations
core - germany france,
| periphery - portugal ireland
43
what are problems with the big capital flows (bank loans) from ez core nations to periphery locations
cheap credit used to finance consumption rather than investment,
periphery became dependent on foreign lenders to cover savings - investment gap
44
stability and growth pact d
rules that ensure the value of the euro is maintained by enforcing fiscal responsiblity,
annual budget deficit no greater than 3% of GDP and national debt that is no greater than 60% of GDP
45
explain how the eurozone countries were affected by the financial crisis
financial crisis - core ez members no longer lend periphery,
dec 2008 eu leaders agree on 200bn euro stimulus plan (to boost european growth following global financial crisis),
raised concerns about viability of banks and governent,
2010 concern builds over heavily indebted countries (portugal ireland greece),
euro continues to fall against dollar and pound,
feb 2011 imf steps in with bailout woth 500bn to save indebted countries
46
explain greek situation during financial crisis
core ez stop lending to periphery because of financial crisis,
2009 greek government announces budget deficit 12.7% of GDP (violation of sgp),
ratings agencies downgrade greek bank and government debt,
eu promise to act over greek debt - command greek government to make spending cuts
47
how has government debt changed over time
for oecd countries it grew largely during the 1970s, growth slowing down in 1980s and since financial crisis has been on the rise
48
debt accumulation equation when no inflation and constant interest rate
∆B = G-T + rB,
| debt accumulation = primary deficit + debt service
49
what does the symbol i mean
nominal interest rate
50
what does the symbol r mean
real interest rate
51
what does the symbol pi mean
inflation
52
what is the fischer equation basic
r ≈ i-π
53
what is the equation that is equal to 1+i
(1+r)(1+π)
54
how does (1+r)(1+π) mean that r≈ i - π
because if you expand it out then you get i = r + π +rπ,
| rπ is approximately equal to zero because they are both small numbers like (0.05 x 0.025)
55
what is the equation for the accumulation of government debt in the period (star)
∆Dt+1 = Gt - Tt +rDt,
government debt in period = government expenditure - amount raised by taxation + interest rate x government debt in period
56
how do you change this equation to get rid of the ∆ (∆Dt+1 = Gt - Tt +rDt) (star)
Dt+1 - Dt = Gt - Tt +rDt,
then rearrange to get,
Dt+1 = Gt - Tt + (1+r)Dt
57
formula for the debt ratio in the period
dt = Dt / Yt,
| debt ratio in period = government debt in period / GDP in period
58
if X=YZ and gx gy and gz are the respective growth rates what is the relationship
gx ≈ gz + gy
59
if X=Y/Z what is the relationship between gx gy and gz
gx ≈ gy - gz
60
if X=Y^αZ^β what is the relationship between gx gy and gz
gx ≈ αgy + βgz
61
if dt = Dt / Yt then knowing those rules about changing growth rates what is the equation of the growth rates of all these variables in relation to each other
(∆dt+1/dt) = (∆Dt+1/Dt) - (∆Yt+1/Yt),
growth rate of debt ratio = growth rate of debt - growth rate of output (assumed to be constant (constant growth rate assumed))
62
what happens to this equation when you sub in the fact that the growth rate is constant (∆dt+1/dt) = (∆Dt+1/Dt) - (∆Yt+1/Yt)
(∆dt+1/dt) = (∆Dt+1/Dt) - g
63
what happens to this equation when you multiply both sides by Dt/Yt (remember that dt=Dt/Yt) ((∆dt+1/dt) = (∆Dt+1/Dt) - g)
∆dt+1 = (∆Dt+1/Yt) - gDt/Yt
64
sub ∆Dt+1 = Gt - Tt + rDt into (∆dt+1 = (∆Dt+1/Yt) - gDt/Yt)
∆dt+1 = (Gt - Tt + rDt)/Yt - gDt/Yt
65
rearrange (∆dt+1 = (Gt - Tt + rDt)/Yt - gDt/Yt)
∆dt+1 = (Gt - Tt)/Yt + (r-g)Dt/Yt
66
what could you do to this equation (∆dt+1 = (Gt - Tt)/Yt + (r-g)Dt/Yt)
drop the time subscripts and use ∆D/Y to denote the change in the debt ratio,
∆D/Y = (G-T)/Y + (r-g)D/Y
67
what is the case if g is higher than r for the debt to GDP ratio
can be reduced even if there is a primary budget deficit
68
if g = r what is the only way to reduce the debt to GDP ratio
to improve the budget,
| or run a budget deficit and rely on the fact that the economy is growing quicker than debt
69
what does d mean
debt ratio
70
what does D mean
government debt
71
high inflation means debt to gdp will ____
reduce
72
high nominal interest rate means debt to gdp will
increase
73
what are the two reasons that government debt can increase
Gt > Tt primary deficit adds to stock,
| rDt real interest
74
what is explosive procedure
high Dt -> high rDt -> accumulate more debt
75
what could still happen when G=T
overall budget still in deficit,
| keep borrowing to pay interest on interest on existing debt, more indebtedness
76
inflation ____ the value of the debt
erodes
77
how can you use the equation Tt - Gt = rDt to work out the required primary surplus to stabilise
(Tt - Gt)/Y = rDt/Y, y not grow so g=0,
| multiply net debt by the interest rate
78
if r > g then what is needed to stabilise the debt
budget surplus
79
if the growth rate is not constant then what equation can be used to calculate the primary surplus required to stabilise the debt
∆D/Y = (G-T)/Y + (r - g)D/Y
80
how can you use the equation ∆D/Y = (G-T)/Y + (r - g)D/Y to calculate the primary surplus required
will be given r, g and the debt (D) and then you set ∆D/Y equal to zero and rearrange to get (T-G)/Y = (r-g)D/Y then use the equation to calculate
81
what are the three methods used by governments to stabilise government debt
austerity,
focus on growth,
default
82
multiplier equation
1/1-mpc
83
marginal propensity to consume
if given one dollar, by how much will consumption increase
84
what are some internal austerity measures
budget cuts, tax increased, privatisation
85
what are some external austerity measures
increase exports, reduce imports, tariffs, quotas
86
how does the multiplier relate to austerity
needs to be low because otherwise will reduce ad by a lot which is bad for growth
87
how does focusing on growth affect the equation D/Y
increases the denominator, long run solution
88
explain how latin america focussed on growth to reduce debt
```
export led growth (comparative advantage in labour and natural resources),
devalue currency (became price competitive)
```
89
explain how europe focussed on growth to reduce debt
```
comparative advantage (educated labour and manufacturing),
increase fdi (service sector integration)
```
90
explain the solution to getting out of debt, default
country fails to pay its creditors (argentina 2001)
91
what is an example of a country who failed to pay its creditors and when
Argentina 2001
92
what was the deal with growth and interest rates in 1960s europe
g > r so debt goes down, not worried about primary deficit
93
what was the deal with growth and interest rates in 1970s europe
lower growth also low interest rates g > r so reduced debt to GDP ratio
94
what was the deal with growth and interest rates in 1980s
i increased dramatically r > g primary surplus needed to reduce debt to GDP ratio
95
what are the causes of an increase in the debt ratio
slow growth,
r > g, increases interest payments more than income generated,
primary deficit and public interventions in financial system (bailout of bank)
96
what happens if the overall debt accumulation budget is in surplus
government can retire some of its existing debt or accumulate assets
97
why is the debt accumulation process explosive
the higher the current stock of debt B, the higher is debt service rB so the larger the deficit and the larger the need to accumulate more debt
98
without any further effort to control it, at what rate will debt accumulate (think about the equation)
r
99
what is a more reasonable objective than stabilising the debt
stabilising the debt to gdp ratio
100
when is the growth of the debt explosive
when the real interest rate exceeds the economy's growth rate
101
what happened between 1980 and 1995 in the uk to do with debt
real growth hardly changed (2.4%),
real interest rates (4.7%),
debt process became explosive
102
what happened to do with debt between 1960-1980 in the uk
```
real interest rates (0.9%),
real growth (2.4%),
debt accumulation not explosive relative to gdp
```
103
why is a fall in long term growth a cause for concern for debt
endanger the stability of already high levels of government indebtedness
104
what is seigniorage
revenue from the activity of issuing currency and spending it, difference between the value of the money and the cost to produce and distribute it
105
what is the equation for seigniorage
∆(M0/P)
106
what is the equation for the debt account once seigniorage is included
∆B + ∆(M0/P) = G-T + rB,
| new debt + seigniorage = primary deficit + interest payments
107
if seigniorage is used to reduce the debt what is a trade off that is faced
explosiveness of the debt transferred elsewhere into inflation
108
what does inflation do to the real value of obligations the government has issued in its own currency
erodes the real value
109
how is the inflation tax and seigniorage related
seigniorage leads to money growth and therefore inflation and debt relief via the inflation tax
110
what is the inflation tax
penalty for holding cash at a time of inflation, so for debt it is the real capital loss suffered by debt holders as the money they are owed is eroded
111
how is the inflation tax a gain for the government
the reduction of the real value of the debt is a gain for the government
112
why does using the inflation tax method of reducing the debt does it only work if the inflation is unanticipated
when debt-holders anticipate inflation they demand a nominal interest rate which compensates them for the expected erosion of the principal
113
what is the main problem with cutting the deficit as a method of reducing public debt
politically hardest to implement,
| face significant resistance from those directly affected (government employees or everyone if taxes are increased)
114
what has to be true for the inflation tax to work
inflation has to be unexpected,
| real interest rate must fall
115
why must the interest rate fall for the inflation tax to work
if it does not fall the real cost of servicing the debt remains unchanged
116
why if there is high inflation are the interest rates on the bonds not modified (inflation tax)
nominal interest rates on long-maturity assets cannot be modified as they are contractually fixed for the whole life of the asset
117
what is the problem with using the inflation tax to erode public debt
buyers of new bonds demand higher nominal interest rates to avoid losing out,
suspicious lenders will be less willing to agree to long term loans
118
what can inflation tax often lead too
hyperinflation
119
explain the self-fulfilling prophesy of interest rates and debt
lenders to the government are worried that a government might default on their loans,
interest rates are high because scared that they will lose money,
120
expansionary fiscal policy is policy that is expected to _____ aggregate demand
increase
121
what does a substantial part of government outlays consist of
transfers such as pensions, child allowances and social assistance
122
what are some examples of things which are government transfers
pensions, child allowances and social assistance
123
what are the three subsectors that the public sector is often divided into
central government,
local governments,
social security funds
124
what are examples of things that the central government is in charge of in terms of spending
defence,
judicial system,
higher education and research and national transport systems
125
what are examples of things that the local government is in charge of in terms of spending
local schools,
roads,
transport systems
126
who is the responsibility for health care and social assistance shared between
local and central government in different ways in different countries
127
what does the social security fund primarily consist of
public pension system
128
what does the income side of the government primary consist of
taxes and social security fees that households and firms pay to the government
129
how much is government consumption on average as a percentage of gdp
20%
130
what is something that is considered government consumption in scandinavian countries but not in the us and why
healthcare (a visit to the hospital for example),
| counts as government consumption in scandinavia, counts as private consumption in the us
131
how does the amount spent on government consumption and government investment compare
small share on investment such as buildings or roads,
| 2-4% of gdp compared with 20%
132
examples of government investment
buildings or roads
133
is the amount spent by the government on government expenditure the same in all countries
no
134
what is the average percentage of government expenditure as a share of gdp
between 20-30%,
| US 21%, sweden denmark netherlands 32%
135
what are examples of stuff purchased by government but produced by the private sector
buildings,
roads,
equipment,
other supplies
136
is the proportion of GDP produced by the government the same as the proportion used by the government
no, the proportion produced by the government is smaller than the proportion used by the government, this is because government buys things from the private sector as well as producing
137
if government income is 45% and government expenditure is 25% what is the difference
transfers
138
what percentage of gdp is transfers average in eurozone
23%
139
what is this term called (r-g)D/Y
interest rate growth differential
140
what is this term called (G-T+iD)/Y
nominal budget deficit
141
what is this term called (π+g)
nominal growth of gdp
142
equation for change in debt ratio including interest and inflation
∆D/Y = (G-T+iD)/Y - (π+g)D/Y,
| ∆ debt ratio = nominal budget deficit - nominal growth of gdp
143
how do you get to this (∆D/Y = (G-T+iD)/Y - (π+g)D/Y) from (∆D/Y = G-T/Y + (r-g)D/Y)
using fischer equation r=i-π,
∆D/Y = G-T/Y + (i-π-g)D/Y,
= G-T/Y + iD/Y - (π+g)D/Y,
= (G-T+iD)/Y - (π+g)D/Y
144
what does government debt take the form of
government bonds and treasury bills that are held by households, firms and financial institutions in the country and abroad
145
what does Dt include
bonds and treasury bills issued by the government minus government claims on households and firms such as student loans and loans to private firms
146
∆Dt+1 =
Gt - Tt + rDt,
| primary deficit + interest payments in real terms
147
what is a simple and intuitive definition of sustainable government finances
government debt does not grow faster than GDP
148
what happens if government debt grows faster than GDP and the government does not raise taxes or cut expenditure relative to GDP
government debt will eventually become many times larger than GDP and the interest payments on the debt will become astronomical
149
if the amount of debt brought into period t is dt = Dt / Yt then what is the growth rate of gdp
(∆dt+1)/dt = (∆Dt+1)/Dt - (∆Yt+1)/Yt
150
what do you do to this equation next ((∆dt+1)/dt = (∆Dt+1)/Dt - (∆Yt+1)/Yt)
multiply by Dt/Yt (dt=Dt/Yt) and substitute in the constant growth rate g,
∆dt+1 = (∆Dt+1)/Yt - gDt/Yt
151
what do you do to this equation next (∆dt+1 = (∆Dt+1)/Yt - gDt/Yt)
using ∆Dt+1=Gt-Tt+rDt,
| ∆dt+1 = (Gt - Tt + rDt)/Yt - gDt/Yt
152
what do you do next to the equation (∆dt+1 = (Gt - Tt + rDt)/Yt - gDt/Yt)
∆dt+1 = (Gt - Tt)/Yt + (r - g)Dt/Yt
153
what do you do next to the equation (∆dt+1 = (Gt - Tt)/Yt + (r - g)Dt/Yt)
omit the time index for simplicity,
| ∆D/Y = (G-T)/Y + (r-g)D/Y
154
what does this term show ((r-g)D/Y)
if the real interest rate exceeds the growth rate, an amount is added to the government debt ratio and this amount depends on the government debt ratio at the beginning of the year
155
if the real interest rate and the growth rate of gdp are the same then what needs to happen in order to keep the debt ratio constant
G = T
156
what do you do to this equation next to introduce inflation (∆D/Y = (G-T)/Y + (r-g)D/Y) (try writing it out in order to derive it)
introduce r=i-π,
| ∆D/Y = (G - T + iD)/Y - (π + g)D/Y
157
country with growth=2%,
inflation=2%,
net debt=50% of gdp,
what deficit would be consistent with a stable debt ratio
a deficit equal to 2%
158
country with inflation=4%,
growth=6%,
debt ratio=50% of gdp,
what deficit would be consistent with a stable debt ratio
deficit equal to 5%
159
why has norway accumulated a large negative net debt ratio
because most of its oil revenue has been saved
160
what is the lost decade
persistent yet ineffective emphasis on austerity led to years of lackluster growth in latin america, now collectively referred to as the lost decade
161
how did latin america get in so much debt
borrowed loads of money from petrodollars via us banks because of low interest rates and then spent it on consumption instead of investment which would bring back a return
162
_____ alone cannot solve a debt crisis
austerity
163
what is an example of a time where austerity alone did not solve a debt crisis
latin america,
| harsh budget cuts, tax increases, privatisation and import suppression only reduced GDP per capita more in the 1980s
164
what do the imf now encourage during times of recession as a result of the what happened in the latin american debt crisis
discourage harsh austerity during times of recession and recommend spreading fiscal reform over time while simultaneously pursuing growth
165
austerity alone can _____ the crisis
prolong
