Module 14.1: Fiscal Policy Objectives Flashcards
(24 cards)
What does fiscal policy refer to?
A government’s use of spending and taxation to influence economic activity
What is a balanced budget?
When tax revenues equal government expenditures
What occurs during a budget surplus?
Government tax revenues exceed expenditures
What occurs during a budget deficit?
Government expenditures exceed tax revenues
What is considered expansionary fiscal policy?
An increase in the deficit or a decrease in a surplus that tends to increase GDP
What is considered contractionary fiscal policy?
A decrease in a deficit or an increase in a surplus that tends to decrease GDP
What does monetary policy refer to?
Central bank actions that affect the quantity of money and credit in an economy
What is expansionary monetary policy?
When the central bank increases the quantity of money and credit in an economy
What is contractionary monetary policy?
When the central bank reduces the quantity of money and credit in an economy
What are the goals of both monetary and fiscal policies?
Maintaining stable prices and producing positive economic growth
What are the objectives of fiscal policy? List them.
- Influencing the level of economic activity and aggregate demand
- Redistributing wealth and income among segments of the population
- Allocating resources among economic agents and sectors in the economy
What impact do decreased taxes and increased government spending have?
Increase a budget deficit, overall demand, economic growth, and employment
What impact do increased taxes and decreased government spending have?
Decrease a budget deficit, overall demand, economic growth, and employment
How do budget deficits respond to economic conditions?
Increased in response to recessions and decreased to slow growth when inflation is too high
What do Keynesian economists believe about fiscal policy?
Through its effect on aggregate demand, It can have a strong effect on economic growth when the economy is operating at less than full employment
What do monetarists believe about fiscal stimulus?
Its effect is only temporary; monetary policy should be used to manage inflationary pressures
What is discretionary fiscal policy?
Spending and taxing decisions intended to stabilize the economy
What are automatic stabilizers?
Built-in fiscal devices triggered by the state of the economy
What happens to tax receipts during a recession?
They fall, leading to increased government expenditures on unemployment insurance
What is the debt ratio?
The ratio of aggregate debt to GDP
What happens if the real interest rate on government debt is higher than the real growth rate of the economy?
The debt ratio will increase over time
What are arguments for being concerned with the size of a fiscal deficit? List them.
- Higher deficits lead to higher future taxes. Higher future taxes create disincentives to work and entrepreneurship
- Loss of market confidence may lead to government default or inflation because investors aren’t willing to refinance debt. This leads to government printing of money and increase in inflation.
*increased government borrowing will tend to increase interest rates, and slow firms from borrowing/investing.
What is the crowding-out effect?
Increased government borrowing leads to higher interest rates, reducing private-sector borrowing and investment
What are arguments against being concerned with the size of a fiscal deficit? List them.
- Debt primarily held by domestic citizens may overstate the problem
- Debt used for productive investment can lead to future economic gains
- Deficits may prompt needed tax reform
- If Ricardian equivalence holds, [private savings offset the government deficit]
- Deficits can aid in increasing GDP and employment when operating below full capacity
