Chapter 13: Fiscal policy

Question 1

What is fiscal policy?

Answer 1

Government decisions about the level of taxation and government spending on the public sector.

it can shift the Ad curve, and smooth out fluctuations.

Question 2

How can Fiscal policy combat a recession?

Answer 2

enacts expansionary policy: the effect of decisons about government spending and taxation that increases AD

spend more, tax less

Question 3

How can Fiscal policy combat inflation?

Answer 3

inacts contractionary policy: the effect of decisions about the government spending and taxation that decreases AD

tax more, spend less

Question 4

What is Discretionary policy?

Answer 4

the idea that It is hard for economists to tell where the current economy is, and by the time they spend money or tax, the economy has alread changed.
there is a TIME LAG
- government spending is made with insufficient information.

Question 5

What is Autonomus fiscal policy?

Answer 5

the economy should be left to dealt with short-run fluctuations on its own.

Automatic stabilizers: already existing Taxes & Government spending that stabalize the economy without government action

Question 6

What is the Ricardian Equivalence?

Answer 6

• predicting future economic behavior
• consumption decreases when the Government is trying to boost spending to get the economy flowing.
  people end up saving their money because they know they need to save for future taxes

Question 7

What does the Government’s budget look like?

Answer 7

it shouldn’t be over 50% of people’s income
budget deficit rises when the government spends to get out of a recession.
Tax revenue falls when people earn less & spend less.

Budget surplus: extra money
Budget deficit: spending more money than they have

Question 8

What is public debt?

Answer 8

the total amount of money the government owes.
it increases with deficit and decreases with surpluses

Benifits: flexability and investment for growth in the LRAS

Question 9

What is the cost of public debt?

Answer 9

Direct: the intrest government pays for it’s own debt is a very large amount
Indirect: it can distort the credit market, slow economic growth, and crowd out private borrowing.

Question 10

What is the difference between a bond and a trasury bill?

Answer 10

Bonds: Money borrowed for more than 2 years: an I o U

Treasury Bills: Money borrowed for less than 2 years