Book: Fiscal Policy Summary Flashcards
How foes a fiscal expansion affect output in the short run
Increasing government spending or cutting taxes increases output in the short run. If moves the IS curve to the right.
How is the interest rate affected by a fiscal contraction
All else equal the central bank will reduce the interest rate to combat the downward effect on output
Does fiscal policy have a one for one effect on output
No because of the multiplier effect. A change in fiscal policy changes disposable income which affects C in addition to G
What role can fiscal policy play in avoiding the liquidity trap
When at the zero lower bound increased fiscal stimulus can still be used to ward of a recession. This was not enough to undo the gfc though
What would happen if a fiscal consolidation took place at potential in the short run and medium run
In the short term it would lead ti a recession as consumption decreases but in the medium run it just changes the composition of output as investment increases in equal proportion to savings
How does saving affect output in the long run. Aka running a public surplus or deficit
In the long run saving increases output through capital accumulation. A larger deficit is therefor bad in the long run
How can reducing fiscal deficit improve short term growth
If expectations become higher consumption increases
Is fiscal policy more affective in fixed or flexible exchange rate regimes
Fixed as in flexible foreign goods prices don’t move with the domestic economy
Is debt and deficit the same thing
No but they are related. Debt is the total amount owed while deficit is the yearly amount for which the government acted beyond its means. Debt is the sum of past deficits
How is deficit calculated
def=r*B + G - T
The sum of real interest payment on past debt and G-T
Why use real interest rate when calculating deficit
Because inflation, inflation adjusted deficit is the correct deficit
What is primary deficit or surplus
Difference between spending and taxes without counting interest payments for previous loans
What primary surplus is required to repay the government debt in year t
T-G=(1+r)^ t-1
What does interest payments on government debt imply for future taxes
Decreases in tax that creates a deficit will lead to increased tax payments in the future and the longer the government waits the greater the tax increase will need to be
How can a country reduce its debt to gdp ratio
By running a surplus, growing faster than real interest payments or reduce the real interest by increased inflation which means paying bond holders with negative interest in real terms. ( pretty evil and unsustainable outside extreme circumstances )
What is the Ricardian equivalence proposition or the Ricardo Barro proposition
That nether deficit nor debt have an effect on output if you take into account the government budget constraint as consumption does not change seeng as the deficit simply takes money from the future so their total wealth through time stays the same and the decrease in public savings will simply shift to private savings as the deficit is put into the private sector that saves for the coming tax increase
How does the Ricardo Barro proposition hold up to reqlity
The detrimental effect in the long term is lessened but not entirely as tax cuts are rarely announced with a coupled tax increase and consumers are not totally calculating by total wealth especially when things are uncertain and potentially far into the future
What is cyclically adjusted deficit
Taking account government debt cycles when judging if debt is abnormally high or low. If zero all id good
What is the automatic stabilizer in a recession
As taxes are based in output and government spending is not it proportionally increases during a recession which as a stabilizing effect but also leads to a deficit
What is required to calculate cyclically adjusted deficit and why is it difficult
You need to asses how change in output affects deficit and then you need to asses how far it is from potential to se how it will move. It is difficult because potential is a product of the natural rate of unemployment which is hard to know
What is tax smoothing
Using debt and surplus to decrease the fluctuations in taxes to keep people from working black and complaining
How can fears about the government debt worsen the situation
Increased fear leads to higher interest rates which demand higher surplus which slows down the economy which decreases the ability of payment
What is the difference between interest rate on bonds called
Spread
What is a basis point
0.01%
What is a haircut of 30%
When a government realizes that it cannot repay its full debt and removes 30% of it
Why not default
Depending on who holds it it will destroy pensions, banks, international reputation and credibility
What is money finance or debt monetization
Relying on inflation to reduce debt
What is fiscal dominance of monetary policy
When the government controls the central bank
What is seniorage
Difference in money supply/prices
dH/P
What is gross debt
Total debt including the debt owned by government entities such as social trust funds
What is net debt
Debt held by the public, owed to entities outside the government, private individuals and foreign entities
