4.5.3 Public Sector Finances ✅

Question 1

What are automatic stabilisers? Give examples?

Answer 1

Mechanisms that reduce the impact of changes on national income. Change throughout the business cycle.
Expenditure and tax.
Eg. Recession = benefits increase due to more unemployed. (Prevent such a fall in ad).

Question 2

How is a discretionary fiscal policy different from automatic stabilisers? What do they try do?

Answer 2

It is the deliberate manipulation of gov spending/tax to influence economy.
Either expansionary or deflationary.
Correct market failure.

Question 3

What is the distinction between fiscal deficit and national debt?

Answer 3

National debt is a sum of the debt suit up. Fiscal deficit is when gov spends more than it receives that year.

Question 4

What is the public sector net cash requirements?

Answer 4

When gov needs to borrow.

Question 5

What are the sections of a budget deficit?

Answer 5

• cyclical
• structural

Question 6

What is a cyclical deficit?

Answer 6

Part of spending that changes as tax and rev changes around trade cycle. (In recession is higher).

Question 7

What is structural deficit? Give examples? Is it good?

Answer 7

Fiscal deficit when cyclical is zero. (Not related to cycle).
Long-term effects of aging population + tax avoidance.
No = want to avoid it (hard to avoid).

Question 8

What can influence the size of fiscal deficit?

Answer 8

• state of economy.
• discretionary fiscal policy.
• demographics.
• rules on borrowing.
• debt interest.

Question 9

How does the economy state influence fiscal debt?

Answer 9

Will influence cyclical deficit which is that increases will increase the whole thing.

Question 10

How will discretionary fiscal policy influence the size of the deficit?

Answer 10

Expansionary fiscal will cause a deficit or austerity (deflationary) will reduce it eg since 2010 deficit has reduced by 75%.

Question 11

How does demographics influence fiscal deficit?

Answer 11

If you have older people you will spend more.

Question 12

How does debt interest rates effect deficit?

Answer 12

If your interest increases then you are paying more.

Question 13

What influences the size of national debt?

Answer 13

• continuous deficit will lead to rising debt.
• aging population (gov will run structural deficit).

Question 14

What is the significance of fiscal deficit and national debt?

Answer 14

• Raises interest rates.
• Interest payment = opportunity cost.
• Inflation.
• Reduced credit rating
• Limit foriegn currency thus imports.
• Growth benefits.

Question 15

How does high fiscal deficit cause inflation?

Answer 15

I increased gov spending w no fall in Consumption will increase AD and be inflationary. If they print money this can also cause inflation.

Question 16

How does high deficit and debt influence credit rating? How can this be bad?

Answer 16

High debt wil reduce credit rating for gov. Therefore higher interest rates are demanded.

Question 17

How can deficit and debt influence growth?

Answer 17

If the money was spent on capital/investment then this will improve the supply side of the economy + to stimulate demand.

Question 18

How does debt and deficit influence interest rates int he economy? When will this not be the case.

Answer 18

High debt/borrowing may raise the rate due to increase of demand this may cause crowding out.
If gov borrows overseas or during a recession when demand for money is low.

Question 19

Why is butget deficit/ debt influential for future?

Answer 19

Meant that future generations will be forced to pay for today except if it is to capital + inflation overtime will limit the impact of debt on future generations.