Chapter 20 Flashcards
What is the fiscal policy?
Fiscal policy is a policy taken by the treasury (Minister of finance) and is defined above as discretionary which changes in government spending and taxes are at the option of the government
What are the three tools under fiscal policy?
- Government expenditure/spending
- Taxes
- Some combination of the two
What is recession due to in the aggregate demand curve?
Recession is due to a sharp decline in investment spending, which has shifted the economy’s aggregate demand curve to the left
What is expansionary fiscal policy?
Expansionary fiscal policy is to boost spending in a recession and leads to economic growth.
What is the aim of the expansionary fiscal policy?
The expansionary fiscal policy aim is to increase GDP by increasing government spending and decreasing taxes to increase consumer’s disposable income
What combination will the government use in the expansionary fiscal policy?
The government may combine spending increases and tax cuts to produce the desired initial increase in spending and the eventual increase in aggregate demand and real GDP
What does Expansionary policy do to the aggregate demand curve?
Expansionary policy shifts the Aggregate demand curve to the right
What is contractionary fiscal policy?
Contractionary fiscal policy is to decrease spending to combat inflation in the growth and expansion. This is due to the demand being high
What causes the contractionary fiscal policy in the government budget?
When the economy faces demand-pull inflation, fiscal policy should move toward a government budget surplus, tax revenues in excess of government spending
What is the aim of contractionary fiscal policy?
Contractionary fiscal policy aim is to decrease GDP by decreasing government spending and increasing taxes to decrease consumer’s disposable income and consumption
What combination will the government use in the contractionary fiscal policy?
The government may choose to combine spending decreases and tax increases in order to reduce aggregate demand and check inflation
What does contractionary policy do to the aggregate demand curve?
Contractionary fiscal policy shifts the aggregate demand curve to the left
What are built-in stabilisers?
Built-in stabilizers are anything that increases the government budget deficit during a recession and increases its budget surplus during an expansion without requiring explicit action by policymakers
What a progressive tax system?
A progressive tax system is where your tax is proportional to your income, the more you earn the more taxes you pay.
What is South Africa progressive system?
South Africa has a progressive tax system, where the the net tax revenues vary directly with GDP.
What is a proportional tax system?
A proportional tax system is a tax system where everyone pays the same amount of tax
What is a regressive tax system?
A regressive tax system is where taxes and income are disproportionate. It is a tax system where the more you earn, the less tax you pay
What is the relationship between GDP and tax revenue?
As the economy moves toward a higher GDP, tax revenues automatically rise and move the budget from deficit toward surplus. As GDP falls during a recession, tax revenue automatically declines, increasing spending and the economic contraction
What are the problems with fiscal policy?
- Problems of timing
- Political considerations
- Furtue policy reveals
- Offsetting state and local finance
- Crowding out effect
What is the fiscal problem of timing?
Problems of timing: Recognition lag, Administration lag, Operation lag
What is the fiscal problems in political considerations?
Political considerations: Political business cycles, and how politics affects policy decisions
What is the recognition lag?
Recognition lag is the time between the beginning of a recession or inflation and the certain awareness that it is actually happening
What is the administration lag?
Administration lag is the lag between the time needed for fiscal policy action to be recognised and the time the action takes place
What is the operation lag?
Operation lag is between the time the fiscal action is taken and the time that action affects the output
