Long run fiscal policy Flashcards
is government spending in oecd countries greater now or 100 years ago
government spending is many times greater than 100 years ago
what are the two different elements of public spending
expenditure on consumption (civil servants' salaries), investment goods (eg new hospital)
how is government expenditure on consumption and investment shown on equation Y=C+G+I+NX
consumption through G,
investment through I
how are transfer payments by the government shown on the equation Y=C+G+I+NX
they affect C via their impact on household disposable income
what are the three ways a government can distribute income
over an individuals lifetime (tax when young benefits when old), across households (high taxes high income), across generations (intro of state pension)
what is Dt
real debt at end of t
what is Tt+1
taxation (in real terms at end of period)
what is Govt+1
government spending
what is rt+1Dt
interest on outstanding public debt
what is a primary budget deficit
when govt+1 > Tt+1
how does a ponzi scheme work
attract new investors by offering unusually high returns,
pay current investors using the money from the new investors rather than from profits earned
what does no ponzi schemes mean
can’t pay off debt with evermore amounts of debt
what’s d
debt to gdp ratio d=D/Y
what is pst+1
primary surplus-to-gdp ratio in period t+1
what is gt+1
economy’s growth rate between t and t+1
what is r equal to (fisher equation)
r = i - π
does debt to gdp stay similar over time
nom the debt-to-gdp ratio can change dramatically over time
all else being the same what happens when aggregate (public and private) capital does not grow as fast as it would have done under a lower public debt burden *
the economy’s productive capacity will also be permanently lower due to the crowding-out effect of public debt on private investment
what are the two main components of government spending
public spending and transfer payments
what can public government spending be split into
expenditure on consumption goods (civil servants’ salaries) and expenditure on investment goods (new hospital)
examples of transfer payments by the government
state pension for retired,
jobseekers allowance for the unemployed,
maternity pay for mothers with young babies
without investment what can’t happen
an economy’s productive potential can’t grow
what are the two basic ways of financing a given amount of real government spending
through taxation or debt accumulation
are fiscal policy decisions over time related to each other
through the GIBC fiscal policy decisions over time are interdependent of each other (lower taxes today must imply greater taxes at some point in the future)
does the GIBC preclude an increase in real debt over time
no, as long as that debt grows on average below he average real rate of interest paid on the debt, condition (a) will be verified
does the government have to repay the debt at some point
it is perfectly possible for the government to verify the GIBC without ever fully repaying the national debt
what is paying interest on the debt forever equivalent too
paying interest on the debt forever is equivalent, in present value terms, to paying the debt immediately
what does pst+1 represent
primary surplus-to-gdp ratio
what does gtildat+1 represent
economy’s growth rate between t and t+1
what happens when the real interest rate paid on the debt is greater than the economy’s growth rate
stabilising the debt to gdp ratio requires a country to run, on average a primary budget surplus
the _____ the initial debt-to-gdp ratio and the _____ the difference between the real rate of interest paid on debt and the economy’s growth rate the larger the primary surplus-to-gdp ratio must be
greater, greater
how did the financial crisis affect governments in terms of interest rates *
financial markets lost confidence in countries’ abilities to keep debt under control so required higher rates on government bonds than before, this put enormous pressure on governments to generate primary budget surpluses
what does At stand for
index of technical progress
how does the variable At (index of technical progress) grow
grows exogenously at rate g per period
what rate does the labour force Lt grow at each period
n
what happens to K every period
depreciates at rate δ
equation for output and capital per effective worker *
yt = Yt / AtLt, kt = Kt / AtLt
in equilibrium under perfect competition what do firms equalise
firms want to equalise their marginal product of capital (MPKt) and their marginal product of labour (MPLt) to their respective rental rates rt + δ and wt
in equilibrium under perfect competition what is the marginal product of capital equal to (MPKt) *
MPKt = rt + δ
in equilibrium under perfect competition what is the marginal product of labour equal to (MPLt) *
wt
what is alpha in the cobb douglas equations
it is the share of physical capital
in general equilibrium what is a higher kt associated with
a higher kt must be associated with a lower rt,
due to αkt^α-1 = rt + δ
what are the two equilibrium equations for equilibrium in perfect competition (firm in equilibrium) (write out)
αkt^α-1 = rt + δ
(1-α)Atkt^α = wt
what does g ‘tilde’ represent
per period growth rate of effective workers, AL
what is β
subjective discount factor, captures impatience
in the steady state what happens to capital per effective worker
it must be constant
draw the graph of the evolution of the capital per effective worker over time *
page 25 of book,
write out and understand
for graph of capital per effective worker over time what happens to it as g decreases
the curve shifts up,
this is because gtilde = (1+g)(1+n) so as g increases the bottom of the equation gets smaller so it increases 26