WEEK 6

Question 1

government transfers

Answer 1

payments by government to households for which no good or service is provided in return

Question 2

social insurance programmes

Answer 2

government programmes/transfer payments intended to protect families against economic hardship (e.g. old age, disability)

Question 3

sources of tax revenue

Answer 3

• corporate
• property
• consumption
• social insurance
• individual
• income

Question 4

expansionary/contractionary fiscal policy

Answer 4

expansionary fiscal policy aims to increase AD

• increase in government purchase of goods and services
• tax cuts
• increase in government transfers

contractionary fiscal policy aigms to decrease AD

• decrease in government purchase of goods and services
• increase in taxes
• decrease in government transfers

Question 5

arguments against expansionary fiscal policy

Question 6

Keynesian multiplier

Answer 6

multiplier magnifies new spending into greater income and output because each round of spending becomes someone else’s income

Question 7

will increased government transfers and tax cuts have the same effect as increased government purchases?

Answer 7

• no because changes in tax/transfers is smaller than equivalent changes in government purchases from the outset
• i.e. total effect of spending is equal to initial increase in government transfers where as if MPS = 0.5 (for example) increased spending doubles by end

Question 8

lump sum taxes

Answer 8

taxes which don’t depend on income

Question 9

non-lump sum tax effect on total revenue

Answer 9

if not lump sum tax, TR will depend on the level of real GDP (and reduces size of the multiplier)

Question 10

ceteris paribus, what do expansionary and contractionary fiscal policies do to the budget balance?

Answer 10

• expansionary fiscal policies reduce budget balance
• contractionary fiscal policies increase budget balance

Question 11

government spending equation

Answer 11

government spending = tax revenue - (government spending and transfers)

Question 12

cyclically adjusted budget balance

Answer 12

• estimate of budget if economy were at potential output
• governments use to separate the effects of the business cycle from those of fiscal policy

Question 13

deficit

Answer 13

difference between government spending and tax revenue over fixed period

Question 14

debt

Answer 14

sum of money a government owes at a particular time

Question 15

what are the long run implications of fiscal policy?

Answer 15

• persistent budget deficits lead to increased public debt
• public debt may crowd out investment spending leading to a decrease in economic growth and potentiall a government default

Question 16

what is the debt-GDP ratio?

Answer 16

measure of fiscal health

Question 17

implicit liabilities

Answer 17

spending promises made by the government that are effectively a debt despite not being included in usual debt statistics (e.g. aging population and rising healthcare costs)