14) Fiscal Policy: Effectiveness Evaluated Flashcards
what is good about fiscal policy? List 4
1) more direct than the alternatives
2) fiscal policy is quicker to act than the monetary or supply-side policies
3) can be used to achieve all the macro-objectives
4) works well due to automatic fiscal stabilisers
how is fiscal policy more direct than the alternatives?
eg the government themselves are creating the extra AD, the extra jobs or taking money directly from certain tax payer categories.
why is it good that fiscal policy us much more direct than alternatives?
the policy can be effectively targeted at the right areas of the economy, not just hoping that the other economic agents respond to indirect stimulus, as is the case with other policies
explain how fiscal policy is much more direct than the alternatives:
eg the government themselves are creating the extra AD, the extra jobs or taking money directly from certain tax payer categories. This means the policy can be effectively targeted at the right areas of the economy, not just hoping that the other economic agents respond to indirect stimulus, as is the case with other policies
why is fiscal policy quicker to act than the monetary or supply-side policies?
because it is much more direct
what is an example of fiscal policy being quicker to act?
for example when the Covid 19 pandemic struck, the government used fiscal policy to directly and immediately tackle the crisis. Other policies may have helped over time but were not realistic in the short-term
how can fiscal policy achieves all macroeconomic objectives? (eg expansionary fiscal policy)
eg expansionary fiscal policy may have a multiplier and crowding in effect, hopefully leading to economic growth and low unemployment
how can fiscal policy achieves all macroeconomic objectives? (eg deflationary fiscal policy)
can help control the price level; progressive taxation can be used to ensure a fairer distribution of income; tariffs and subsidies can be used to affect the balance of payments (current account).
can other policies be used to achieve all the macroeconomic objectives?
neither monetary or supply-side policies can effectively tick all of these boxes
why does fiscal policy work well?
due to the automatic fiscal stabilisers. It naturally aguanta in relation to the economic cycle- eg in a boom, G will decrease and T (tax revenue) will increase
why are there many arguments against the over-reliance on fiscal policy (4 points):
1) Fiscal policy relies on good, sensible, well-informed government
2) crowding out
3) disincentive effect
4) expansionary fiscal policy increasing national debt
what are examples of government failure?
a) corruption
b) political priorities taking precedence over wise economic decisions
c) information failure
d) inefficient procedures
where is corruption particularly common?
in developing economies but prevalent to some extent in nearly every country
what is an example of political priorities taking precedence over wise economic decisions?
eg government reducing tax rates prior to an election
what is an example of information failure?
government not correctly identifying the real cause or right solution to a problem
what can cause inefficient procedures?
excessive bureaucracy, meaning that actions take too long to take effect or shoddy practice is accepted
over reliance on fiscal policy can cause crowding out, explain crowding out is?
expansionary fiscal policy requires extensive government borrowing. this leaves a smaller pot of borrowing funds for the private sector to access, meaning that the more efficient users of funds (businesses) have less finance and the less efficient users of funds (public sector) have more
what is the disincentive effect? (Deflationary fiscal policy)
Where higher tax rates (deflationary fiscal policy) can lead to workers choosing to not work, businesses moving abroad or reducing the size of their operations.
what is the disincentive effect? (Expansionary fiscal policy)
Expansionary fiscal policy can lead to an over-reliance on government, eg if unemployment benefits are too generous workers might decide not to work; if governments intervene to protect businesses then business may feel in a falsely strong position compared to foreign competitors
How does expansionary fiscal policy ultimately increase the size of the national debt? (Opportunity cost)
It can have a high opportunity cost - in the future governments may have to repay the debt instead of investing in schools, hospitals etc
What is the disincentive effect? (Deflationary +Expansionary)
Where higher tax rates (deflationary fiscal policy) can lead to workers choosing to not work, businesses moving abroad or reducing the size of their operations. Expansionary fiscal policy can lead to an over-reliance on government, eg if unemployment benefits are too generous workers might decide not to work; if governments intervene to protect businesses then business may feel in a falsely strong position compared to foreign competitors
How does Expansionary fiscal policy ultimately cause inflation? (Inflationary expectations)
Expectations of high future inflation (needed to reduce the real debt) becomes a self-fulfilling prophecy as consumers and businesses choose to spend moremoney now rather than face higher prices in the future
When is fiscal policy the best of the three?
For the achievement of short-term economic objectives
What does fiscal policies success depend on?
Depends on the quality of the decisions made by the government and it also very much depends on the position within the economic cycle
What can expansionary fiscal policy cause in a recession?
May lead to growth without inflation, however expansionary fiscal policy near Yfe will almost certainly cause inflation but not growth
