W9 - Fiscal policy Flashcards
(14 cards)
What is Fiscal Policy
Use of gov monetary powers to influence the economy - e.g healthcare, public pensions
What is the budget
Annual statement of projected outlays and receipts. Forecasts taxes and spending of next year
Budget outlays
Includes all expenditure
- Expenditure on g/s
- Transfer payments (e.g pensions, unemployment benefits)
- Debt interest payments
Budget reciepts
- Taxes and assets
- Taxes on income, wealth and expenditure
- National insurance
- Income from assets, royalties
2 equations for budget balence
BB = Receipts - Outlays
BB = T - G
+ BB = surplus
- BB = Deficit
What should a gov do if they are in a defict
Borrow by issuing government bonds - Debt issuance
- gov repay at different times as have different maturities
Higher taxes or lower spending
Laffer curve
Shows the relationship between tax rates and amount of tax revenue collected
- subsitution effect can make work less attractive
Two-equation model rule
- Closed economy (no interational trade)
so that Aggregate expenditure: Y = C + I + G
IR curve
Interest rate setting, pegged at, horizontal
r = rcb
Is Curve
Investment saving, downwar sloping, interest rate and output
Y = A - xr
Expasionary fiscal policy
When G or T or both increase this increases output - when recession or inflation
- e.g tax cuts, increase gov spending
Contraditionary fiscal policy
Measures gov take to reduce spending and increase taxes - reduces economic growth
Which is better, change in tax rate or gov spending
Kaynes - prefers G as not guarenteed that the revenue saved from T will be spent
- But increase G can cause deficts which will make future generations suffer
How to increse input but without increasing debt
Increase both spending and taxes by the same as BB will be unchanged
