Book 1_Econ_FISCAL POLICY Flashcards
Fiscal policy
refers to a government’s use of spending and taxation to influence
economic activity
The budget
- to be balanced when tax revenues equal government expenditures
- A budget surplus occurs when government tax revenues exceed expenditures
-a budget deficit occurs when government expenditures exceed tax revenues
Monetary policy
refers to the central bank’s actions that affect the quantity of
money and credit in an economy to influence economic activity.
Policy objectives of fiscal and monetary
Policymakers use both monetary and fiscal policies with the goals of maintaining stable prices and producing positive economic growth
Objectives of fiscal policy
Influencing the level of economic activity and aggregate demand
Redistributing wealth and income among segments of the population
Allocating resources among economic agents and sectors in the economy
Discretionary fiscal policy
refers to the spending and taxing decisions of a national government that are intended to stabilize the economy.
Automatic stabilizers
are built-in fiscal devices triggered by the state of the economy
A country’s debt ratio
the ratio of aggregate debt to GDP
Against the government deficit: The crowding-out effect
government borrowing is taking the place of
private-sector borrowing.
Ricardian equivalence
which means privatesector savings in anticipation of future tax liabilities just offset the government deficit.
Spending Tools
Transfer payments
Current spending
Capital spending
Transfer payments
entitlement programs, redistribute wealth,
taxing some and making payments to others. Examples include government-run
retirement income plans (such as Social Security in the United States) and
unemployment insurance benefits.
Current spending
refers to government purchases of goods and services on an
ongoing and routine basis.
Capital spending
refers to government spending on infrastructure, such as roads,
schools, bridges, and hospitals
Revenue Tools
Direct taxes
Indirect taxes
Advantages of fiscal policy tools
Social policies (e.g., discouraging tobacco use) can be implemented quickly via indirect taxes.
Quick implementation of indirect taxes also means that government revenues can be increased without significant additional costs.
Disadvantages of fiscal policy tools
Direct taxes and transfer payments take time to implement, delaying the impact of fiscal policy.
Capital spending also takes a long time to implement; the economy may have recovered by the time its impact is felt.
MPC
Marginal propensity to consume (MPC) measures how much more individuals will spend for every additional dollar of income
The fiscal multiplier
determines the potential increase in aggregate demand resulting from an increase in government spending:
- Fiscal multiplier = 1/(1-MPC(1-t))
Balanced Budget Multiplier
To balance the budget, the government could increase taxes by $100 to just offset a $100 increase in spending
the overall decrease in aggregate demand = 100(MPC) × fiscal multiplier
three types of lag
Recognition lag
Action lag
Impact lag
Issues may hinder the usefulness of fiscal policy
Misreading economic statistics.
Crowding-out effect
Supply shortages
Limits to deficits
Multiple targets
expansionary or contractionary
expansionary: Increase deficit (decrease Rev, increase Spending)
contractionary: Decrease deficit (increase Rev, decrease Spending)