13. Fiscal Policy And Supply-side Policies Flashcards
Fiscal policy
The use by the government spending and taxation to try to achieve the government’s policy objectives
Balanced budget
Achieved when government spending equals government revenue (G=T)
Budget deficit
Occurs when government spending exceeds government revenue (G>T) . This represents a net injection of demand into the circular flow of income and hence a budget deficit is expansionary.
Budget surplus
Occurs when government spending is less than government revenue (G<T). This represents a net withdrawal from the circular flow of income and hence a budget surplus is contractionary
Way of financing a budget deficit
Public-sector borrowing
Ways of eliminating a budget deficit
Raising taxation, cutting public spending
Demand-side fiscal policy
Used to increase or decrease the level of aggregate demand (and to shift the AD curve right or left) through changes in government spending, taxation and the budget balance.
Deficit financing
Deliberately running a budget deficit and then borrowing to finance the deficit
Goal of running a budget deficit on purpose
To achieve full employment and to stabalise the economic cycle, without at the same time creating excessive inflationary pressures.