Chapter 20

Question 1

What is the fiscal policy?

Answer 1

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

Question 2

What are the three tools under fiscal policy?

Answer 2

• Government expenditure/spending
• Taxes
• Some combination of the two

Question 3

What is recession due to in the aggregate demand curve?

Answer 3

Recession is due to a sharp decline in investment spending, which has shifted the economy’s aggregate demand curve to the left

Question 4

What is expansionary fiscal policy?

Answer 4

Expansionary fiscal policy is to boost spending in a recession and leads to economic growth.

Question 5

What is the aim of the expansionary fiscal policy?

Answer 5

The expansionary fiscal policy aim is to increase GDP by increasing government spending and decreasing taxes to increase consumer’s disposable income

Question 6

What combination will the government use in the expansionary fiscal policy?

Answer 6

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

Question 7

What does Expansionary policy do to the aggregate demand curve?

Answer 7

Expansionary policy shifts the Aggregate demand curve to the right

Question 8

What is contractionary fiscal policy?

Answer 8

Contractionary fiscal policy is to decrease spending to combat inflation in the growth and expansion. This is due to the demand being high

Question 9

What causes the contractionary fiscal policy in the government budget?

Answer 9

When the economy faces demand-pull inflation, fiscal policy should move toward a government budget surplus, tax revenues in excess of government spending

Question 10

What is the aim of contractionary fiscal policy?

Answer 10

Contractionary fiscal policy aim is to decrease GDP by decreasing government spending and increasing taxes to decrease consumer’s disposable income and consumption

Question 11

What combination will the government use in the contractionary fiscal policy?

Answer 11

The government may choose to combine spending decreases and tax increases in order to reduce aggregate demand and check inflation

Question 12

What does contractionary policy do to the aggregate demand curve?

Answer 12

Contractionary fiscal policy shifts the aggregate demand curve to the left

Question 13

What are built-in stabilisers?

Answer 13

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

Question 14

What a progressive tax system?

Answer 14

A progressive tax system is where your tax is proportional to your income, the more you earn the more taxes you pay.

Question 15

What is South Africa progressive system?

Answer 15

South Africa has a progressive tax system, where the the net tax revenues vary directly with GDP.

Question 16

What is a proportional tax system?

Answer 16

A proportional tax system is a tax system where everyone pays the same amount of tax

Question 17

What is a regressive tax system?

Answer 17

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

Question 18

What is the relationship between GDP and tax revenue?

Answer 18

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

Question 19

What are the problems with fiscal policy?

Answer 19

• Problems of timing
• Political considerations
• Furtue policy reveals
• Offsetting state and local finance
• Crowding out effect

Question 20

What is the fiscal problem of timing?

Answer 20

Problems of timing: Recognition lag, Administration lag, Operation lag

Question 21

What is the fiscal problems in political considerations?

Answer 21

Political considerations: Political business cycles, and how politics affects policy decisions

Question 22

What is the recognition lag?

Answer 22

Recognition lag is the time between the beginning of a recession or inflation and the certain awareness that it is actually happening

Question 22

What is the administration lag?

Answer 22

Administration lag is the lag between the time needed for fiscal policy action to be recognised and the time the action takes place

Question 23

What is the operation lag?

Answer 23

Operation lag is between the time the fiscal action is taken and the time that action affects the output

Question 24

What happens if the investment demand curve is fixed and the real interest rate?

Answer 24

If the investment demand curve (ID) is fixed the increase in the real interest rate (i) due to public debt/government debt, will move the economy and cause the investment level to decrease, causing crowding out of private investment

Question 25

What is the crowding out effect?

Answer 25

Crowding out refers to what would have taken place but is not taking place

Question 26

What is crowding out due to?

Answer 26

Crowding out is due to the idea that public borrowing drives up real interest rates, which reduces private investment spending