Chapter 13 Flashcards
Economic activity by gov in GDP
major role in GDP, spends lots of money collects lots of taxes
Business cycle and flow of funds for GOV
In as taxes and borrowing, out as transfers and purchases of g/s
3 levels of tax collectors
federal, provincial, municiple
how does government fund programs
through transfers
government transfers
payments to households for which no good or service is provided in return
social insurance programs and 3 examples
government programs intended to protect families from economic hardship
- public pension
- old age security
- guaranteed income supplement
examples of government expenses
salary, roads, construction, buildings, goods and services purchased
Governments role in GDP equation
- directly controls government spending G
- indirectly affects C and I
How is C and I affected by governments
C is affected by taxes and transfers
I is affected by taxes and regulations
Consumer Disposable Income and Government
increase in gov spending, decrease in tax and increase in transfer increase disposable income which increase consumer spending and investment, vice versa
Fiscal Policy how can government shift AD curve
can shift aggregate demand curve by changing taxes, spending, and transfers
Expansionary Fiscal Policy
increase AD to close recessionary gap and expand output to potential: increase in G and TR and reduce in T
Contractionary Fiscal Policy
decreased AD curve to close inflationary gap and decrease output to potential: increase in T and decrease in TR and G
False claims against expansionary fiscal policy (3)
gov spending always crowds out private spending
gov borrowing always crowds out private investment spending
gov budget deficit reduce private spending
why is “gov spending always crowds out private spending” false and when would it be true
would be true if at full employment as every extra dollar spent takes away from firm and consumer
false because during recession puts unemployed to work to generate higher income and spending which increase production
why is “gov borrowing always crowds out private investment spending” false and when is it true
true if economy at full employment as increase gov borrowing will create less funds available, and increase interest rate
false during recession, fiscal expansion leads to higher incomes which increase savings and lower interest rate. Gov can borrow as demand for loanable funds is low
why is “gov budget deficit reduce private spending false”
expansionary policy leads to increase taxes, and there is no way every consumer will predict when taxes are increasing and cut spendings, most consumers will still spend when given extra cash while saving overtime.
Legitimate concerns of fiscal policy
it takes time to ______ (3)
The time lags between policy and implementation
- realize the output gap
- create plan to solve the problem
- implement the action plan
what may happen if an expansionary fiscal policy is created too late
economy would have already self corrected itself back to LR equilibrium output then the fiscal expansionary would create inflationary gap
who gets tax cuts and who gets transfers in an economy
depends on the marginal propensity to consume, typically unemployed or low class citizens have higher MPC rate therefore due to multiplier aids to GDP the most
Lump-sum taxes
taxes that do not depend on the tax payer’s income so no impact on mpc or multiplier ex we all pay 100$
Non Lump-sum taxes
taxes that depend on taxpayer’s income
- effect multiplier as effects consumers mpc
- as GDP increases, taxes increases do to change in disposable income
some income leaks as taxes so changes multiplier size, what is the formula
multiplier= 1/(1-(MPCx(1-t)) where t is tax rate
Automatic stabilizers- what are they, the form they take what do they prevent? How do they affect the multiplier
Automatic expansionary and contractionary policy in form of taxes and transfers due to a recession or inflation. They decrease the severity of a supply/demand shock, decrease the multiplier
more information on slide 22
discretionary fiscal policy
deliberate actions of policy makers by legislation of tax cuts, increase in spending and transfers (vice-versa) to stimulate economy if automatic is not working
Austerity and effect on GDP and relationship to contractionary fiscal policy
sharp cuts in spending plus tax increase,
negative relationship so there is a link between contractionary policy and decline in GDP output
Budget Balance equation plus positive or negative
budget balance=T-G-TR
surplus if positive T>G&TR
deficit if negative, G&TR>T
Discretionary expansionary fiscal policies _____ budget balance for that year. What happens to deficit or surplus?
reduce therefor budget deficit gets larger or surplus gets smaller
Discretionary contractionary fiscal policies _____ budget balance for that year. What happens to deficit or surplus?
increase therefor budget deficit gets smaller or surplus gets larger
Budget Balance and relation to business cycle and unemployment
during recession, high unemployment and high deficit
during expansion, low unemployment and low deficit or even surplus.
Cyclically adjusted budget balanced and what is it used for
budget balance estimate if economy were at potential output and to separate effects of business cycle from discretionary fiscal policy
relation of cyclical and actual budget balance graphically
cyclical doesn’t fluctuate as much as actual therefore deficits are due to depressed economy, not expansionary fiscal policy
why shouldn’t the budget be balanced every year
think about effect of recession and inflation and the stabilizers
automatic stabilizers help control the effect and severity of a recession and inflation, balance budget would make either worse. The surplus is good times should offset the deficit in bad times, so it is balance on average
Give an example of how a balanced budget in a recession would be worse
during a recession gov loses tax revenue, in order to balance they would have to cut their spending which decreases consumer spending making the recession worse
persistent deficit can create government and public _____
debt
deficit
difference between what gov spends and its tax revenue
debt and what is it created by?
sum of money a government owes at a particular time, created by accumulation of deficit
debt to GDP ratio graphically how it rises and falls
rises because of accumulation of deficit and GDP is growing slower, falls if deficit is growing slower then GDP of economy
Problems of rising government debt and descriptions (3)
- crowding out: keeps borrowing from financial market creating less funds available for HH and firms
- financial pressure and default: can’t pay back debt
- Higher interest payments as lack of confidence to pay back
Implicit Liabilities and example
debts that government must pay at a future date ex health care, pensions,
how to curb implicit liabilities such as high life expectancy and aging population
- immigration of young people to boost labour force participation rate
- use funds more efficiently
- reform government funding models
- raise taxes
