Macro Book 6

Question 1

fiscal policy

Answer 1

tax + government spending

Question 2

cyclical budget deficit

Answer 2

one that arises due to the economy’s postion in the business cycle

Question 3

structural budget deficit

Answer 3

persists even during a boom and is the result of fundamental imbalance in goverment spending and receipts

Question 4

budget deficit

Answer 4

• flow variable
• shortfall between government revenue and spending for a year, covered by borrowing

Question 5

national debt

Answer 5

• stock variable
• total of past borrowing still outstanding

Question 6

OBR

Answer 6

office for budget responsibility

Question 7

5 main roles of the OBR

Answer 7

• economic and fiscal forecasting ( 5 year forecasts, twice a year)
• evaluating performance against target
• sustainability and balance sheet analysis
• evaluation of fiscal risks
• scrutinising tax and welfare policy costing

Question 8

counter arguments to expansionary fiscal policy - c……. o…… (2)

Answer 8

1. resource crowding out - government spending e.g on infrastructure increases demand for land, labour, raw materials etc. increasing their prices. Less profitable for firms to increase their scale, disincentivising investment
2. financial crowding out - increase in goverment borrowing to fund spending will increase demand for loanable funds and thus increase interest rates. makes it more expensive for firms and households to borrow money so consumption and investment falls

Question 9

counter argument to expansionary fiscal policy - r……… e……..

Answer 9

Ricardian equivalence - an increase in government spending will increase the budget deficit. Therefore taxes must be increased in the future to balance the budget. Consumers know this so they start to save therefore reducing consumption and offsetting the increase in government spending