10) Fiscal Policy 3: Different Types Of Deficit - MMT

Question 1

What is the size of the deficit influenced by?

Answer 1

The state of the economy

Question 2

In a boom, how does this influence the size of the deficit?

Answer 2

In a boom when the economy is above its potential, tax reviews are relatively high and spending on work-related welfare is low, this reduces the level of borrowing

Question 3

In a recession, how does this influence the size of the deficit?

Answer 3

Borrowing tends to be high, reverse of boom

Question 4

What is a structural deficit?

Answer 4

The part of the deficit that is not related to the state of the economy, eg pensions, you have to keep paying them due to an aging population despite the state of the economy

Question 5

How is the structural deficit measured?

Answer 5

It cannot be directly measured so it must be estimated, which is difficult to do and open to interpretation

Question 6

What is structural deficit useful for?

Answer 6

(This part of the deficit will not disappear when the economy recovers), it this gives a better guide to the underlying level of the deficit than the headline figure

Question 7

What is a cyclical budget deficit?

Answer 7

It considers fluctuations in tax revenue and spending due to the economic cycle

Question 8

How does a recession tie in with a cyclical budget deficit?

Answer 8

In a recession, tax revenues fall and spending on unemployment benefits increases. Therefore, in an economic downturn, it is considered to be automatic that the size of any budget deficit will increase, at the same time as G needs to go up, T is decreasing

Question 9

What are automatic fiscal stabilisers?

Answer 9

Changes in the size of a budget deficit, caused by changes in the economic cycle, are known as automatic fiscal stabilisers

Question 10

In a period of high economic growth what do automatic stabilisers do?

Answer 10

They will help reduce the growth rate

Question 11

What will happen if there is higher growth?

Answer 11

The government will receive more tax revenues - people earn more and so pay more income tax (the tax rate doesn’t change, the received just becomes higher). There will also be a fall in unemployment so the government will spend less on unemployment benefits. In a period of high growth- ceteris paribus, government borrowing will fll

Question 12

In a recession, economic growth becomes…

Answer 12

Negative

Question 13

What will automatic stabilisers do in a recession?

Answer 13

In a recession, economic growth becomes negative, however automatic stabilisers will help to limit the fall in growth

Question 14

Why will government borrowing increase in a recession?

Answer 14

With lower incomes, people pay less tax, and government spending on unemployment benefits will increase. This increase in benefit spending and lower tax collection helps to limit the fall in aggregate demand. In a recession- ceteris paribus government borrowing will increase (its automatic)

Question 15

When does the government engage in discretionary fiscal policy?

Answer 15

When it deliberately changes G and/ or T in order to achieve their macroeconomic objectives

Question 16

What is expansionary fiscal policy?

Answer 16

It’s if they want fiscal policy to help grow the economy (eg increasing G or reducing T)

Question 17

What is deflationary fiscal policy?

Answer 17

If the government wish to reduce AD - normally involving reduced G

Question 18

What is an example of a long period of deflationary fiscal policy?

Answer 18

Between 2010 and 2015 the UK government conducted a long period of deflationary fiscal policy, a period that became known as “austerity”

Question 19

What is the key factor in deciding which type of fiscal policy to use?

Answer 19

The most important factors undoubtedly is the current position of the economy regarding the business cycle

Question 20

Most often than not, implementing fiscal policy requires the government to use a…

Answer 20

Budget deficit

Question 21

Even when the economy is strong, the government’s financial commitments may exceed what they are able to raise in tax, leading to a…

Answer 21

structural budget deficit

Question 22

When the economy is in recession, automatic fiscal stabilisers means that this deficit will… an upsurge called the…

Answer 22

Become much bigger… cyclical budget deficit

Question 23

Sometimes the government may deliberately use fiscal policy to help achieve their wider macroeconomic objectives, this is known as…

Answer 23

Discretionary fiscal policy, and may either be expansionary (to push economic growth) or deflationary