Chapter 11 - Fiscal Policy Flashcards
What are the four goals of fiscal policy?
- Promote smooth functioning of the economy
- Reduce cyclical fluctuations in output and employment
- Income redistribution
- Promote economic growth
What are the tools of fiscal policy?
Government purchases of goods and services, government transfer, and taxes
What is the difference between direct and indirect taxes?
Direct taxes are imposed directly on factors of production i.e. income taxes, corporate taxes, property taxes
Indirect taxes are consumption taxes i.e. GST, sales, excise
What is the difference between transfers and government purchases?
Transfers do not imply an exchange of services i.e. do not expect anything in exchange for providing welfare
What is the equation for disposable income?
Disposable income = earned income - taxes + income transfers
Transfers are like negative taxes
What is automatic fiscal policy?
Changes in taxes and transfers from the business cycle
What is discretionary fiscal policy?
Deliberate changes in taxes, transfers, and purchases by the government
What is the equation for the multiplier and what is it?
Equation:
change in Y = change in Y / change in government spending
= 1 / 1-MPC
The ratio in the change in output resulting from a one dollar change of government spending
Why does an increase in income exceed the original increase in government expenditure?
When the government spends a dollar, expenditure increases by a dollar, which becomes income, and people who get extra income save a part and spend the rest, and this goes on
What is the multiplier equation with MPI? What is it with taxes?
Without taxes: 1/ 1 - (MPC - MPI)
With taxes: 1/1-(MPC-MPI)(1-t)
If government spending increases temporarily, what happens to MPC and the multiplier?
MPC and the multiplier will be lower
To calculate the effect of government spending on income in the near future, what do you do to the multiplier?
Multiply it by .5
Ex. 1/1-(MPC-MPI)(1-t)* .5
Why is fiscal policy limited?
a) the multiplier depends on many factors
b) the multiplier is not large
Is the multiplier bigger or smaller in financial crisis? Why?
Bigger, because there is little private borrowing since credit is restricted - government can do what private industry cannot, so releases borrowing constraints
What is a surplus vs a deficit vs primary surplus?
Surplus = revenue - total spending
Deficit = - surplus
Primary surplus = revenue - program spending excluding interest on debt (only matters when the country defaults on debt)
What is a goal for countries in fiscal trouble?
To have a primary surplus - want primary balance
What is a benefit to primary surplus?
Shows effect of current actions because it excludes interest on debt, which is for actions in the past
What was the deficit in 2020?
10.7%
Up until what year was there a surplus?
2008
What percent of GDP are interest payments now?
Around 1%
What is the meaning of fiscal dividend?
Benfit gained from lower interest payments on debt (like a reduction on interest payments if you repay part of debt
When the government has surpluses, what happens to interest rates?
Interest rates fall
If interest rates fall because of surplus, that is a:
fiscal dividend
By what percent has net debt increased in comparison to before 2019?
50%
What is net debt?
The sum of all past deficits
What is the federal primary surplus/deficit?
The difference between federal revenue and expenditure, ignoring interest on debt
What is the average primary deficit percentage?
1%
What is the deficit when the economy is booming?
Deficit is low because of large revenues and lower expenditure, so cyclically adjusted deficit is higher than actual deficit
What is the deficit where there is a recession?
Deficit is high because of low revenues and higher expenditure, so cyclically adjusted deficit is lower than the actual deficit.
Was there a deficit or surplus in 2020?
Huge deficit
What percent of GDP is made of federal and provincal debt currently?
40%
What are payroll taxes?
Social insurance contributions, employment insurance, etc
For what stage of production is GST paid at?
Each stage of production
What tax makes up the biggest portion of revenue for the federal government?
Income tax (50%)
What percent of federal revenue makes up GDP currently?
14%
What percent of GDP was federal income during the great recession? What did it increase by after?
14.7% of GDP, after increased by 1.5%
Can Canada eliminate the deficit? How?
Yes, it has happened before. By having participation from all governments, having political parties on board, and having attitudes towards the deficit change
By 2011, what percent of GDP was Japan in debt?
200%
True or false: the Great Recession caused the large debts of the G7
True
After the Great Recession, where did debt not accumulate? What country had the second lowest debt accumulation?
Germany did not accumulate debt, Canada had the second lowest
What countries had debt increase more during the Pandemic than during the Recession?
Canada, Italy, and Japan
