Chapter 11 Flashcards
What happens id g=r in the debt ratio?
primary deficit = 0
there is a stable debt ratio
what does a debt financed increase in gov consumption or investment lead to?
raises demand production and income in the SR
leads to a multiplier effect - depends on how much of that additional tax is spent by consumers or paid as tax
why does a tax reduction have a smaller effect on production than an increase in gov consumption?
consumers will save a fraction of their additional increase of disposable income
what happens if consumers see through gov finances? what does this mean in terms of tax reduction? consumption?
realise that all gov expenditure must be paid for by taxes either today or in the future
tax reduction may have little effect on private consumption or AD
consumption will depend on current and expected gov purchases but not WHEN taxes are imposed to finance these purchases (Ricardian Equivalence)
why in practice do we expect a tax reduction to affect consumption?
individuals have finite lives, credit constraints or dont know how tax cuts are financed
what is fiscal and monetary policy associated with? what does this mean for policy making?
lags - info collection, decision making, implementation, time to affect AD
policies are based on forecasts 1-2 years from now
what are automatic stabilisers?
effects on gov income and expenditure that occur automatically without any new policy decisions
what is the structural budget deficit?
what the deficit would have been for given tax and benefit rules if production on its natural level
how does the gov sector play a stabilising role? (in practice)
expenditure relatively stable whereas tax revenue varies with income
gov spending falls as a share of income when income is high while tax revenue is a more stable proportion of income
surplus has positive correlation with the output gap
what does the government spend money on? how does it finance its spending?
gov consumption and investment
interest on gov debt
all paid by taxes and borrowing
what happens if expenditure > tax revenue?
budget deficit and net gov debt will increase
how does the gov share of income, consumption, investment and transfers contribute to GDP?
varies 30 - 60% - income
consumption - 20%
investment - 2-4%
transfers = 20% GDP in most countries
what equation determines the change in the gov debt ratio? give interpretations
change in d/y = (G-T)/Y + (r - g) D/Y
higher primary deficit increases debt ratio
higher r increases DR prop to debt ratio at year beginning
higher g decreases DR and prop DR at year beginning
