ECO 471 (ALL) Flashcards
1
Q
What is public sector economics?
A
A branch of Economics that explains how government intervention tempers the ‘invisible hand’ of the market in a mixed economy
2
Q
What are the primary causes of market failure?
A
1) Information Asymmetry 2) Externalities 3) Public Goods 4) Market Power/Lack of Competition 5) Inequality
3
Q
What are the two conditions for government intervention in an economy?
A
1) Evidence of market failure exists 2) The intervention will improve efficiency
4
Q
List the means of government intervention in an economy
A
“1) State provision 2) Extension of property rights 3) Taxation 4) Subsidies 5) Regulation 6) Prohibition 7) Positive discrimination 8) Redistribution of income”
5
Q
Define public investment
A
Government spending on infrastructure, public services, and capital projects to foster economic growth and improve public welfare
6
Q
What are the key criteria for public investment under Economic Viability?
A
1) Cost-Effectiveness Analysis 2) Cost-Benefit Analysis 3) Economic Multipliers
7
Q
What are the social impact criteria for public investment?
A
1) Public Welfare 2) Equity and Inclusivity
8
Q
What are the environmental sustainability criteria for public investment?
A
1) Environmental Impact Assessment 2) Renewable Energy and Green Infrastructure
9
Q
What is Cost-Effectiveness Analysis (CEA)?
A
A technique that relates the costs of a program to its key outcomes or benefits by dividing total cost by units of effectiveness
10
Q
What is the formula for Cost-Effectiveness Ratio?
A
Cost-Effectiveness Ratio = Total Cost / Units of Effectiveness
11
Q
What is Cost-Benefit Analysis (CBA)?
A
An analysis that weighs program costs against the monetary value of program benefits by subtracting total costs from total benefits
12
Q
What is the formula for Net Benefits in CBA?
A
Net Benefits = Total Benefits - Total Cost
13
Q
What are the steps in conducting Cost-Effectiveness and Cost-Benefit Analysis?
A
1) Set the framework 2) Decide whose costs and benefits to recognize 3) Identify and categorize costs and benefits 4) Project costs and benefits 5) Monetize costs 6) Quantify or monetize benefits 7) Discount costs and benefits 8) Compute ratio or net present value 9) Perform sensitivity analysis 10) Make a recommendation
14
Q
What are user charges?
A
Prices and rationing mechanisms for allocating government-provided goods/services that can promote economic efficiency and distribute costs fairly
15
Q
When are user charges considered appropriate?
A
1) Direct benefits 2) Demand has elasticity 3) No significant inequities 4) Low collection costs
16
Q
When are user charges NOT appropriate?
A
1) Significant external benefits would be lost 2) Perfectly inelastic demand 3) Equity concerns prevent access 4) High collection costs
17
Q
What are the two major rules for applying user charges?
A
1) Charges must cover direct benefits only 2) Inclusion of all costs to society
18
Q
What is the primary motivation for government intervention in the economy?
A
To ensure efficiency in resource allocation, enforce regulation, and promote equity when markets fail
19
Q
What is the key criterion for using charges instead of general taxes?
A
Excludability - the possibility of excluding someone from benefits if they do not pay
20
Q
What types of activities can typically have user charges imposed?
A
Education, highways, parks, sewerage, health care, electricity, telecommunications
21
Q
How do user charges help in economic efficiency?
A
By providing information on the appropriate supply of goods/services and allocating resources to those who value them most
22
Q
What are externalities?
A
“Externalities are costs or benefits of market transactions not reflected in prices. They occur when one entity’s activity directly affects another’s welfare outside the market mechanism, involving a third party not privy to the transaction.”
23
Q
What is a negative externality?
A
“A negative externality is when a cost component is ascribed to third parties other than those involved in the exchange between buyers or sellers. For example, noise pollution from low-flying aircraft affecting nearby residents.”
24
Q
What is a positive externality?
A
“A positive externality occurs when the marginal social benefit exceeds the social marginal cost, and benefits are passed to a third party who is not part of the transaction agreements.”
25
What is the difference between Private Marginal Cost (PMC) and Social Marginal Cost (SMC)?
"PMC represents the cost directly borne by producers, while SMC includes additional costs to society not reflected in the market price. In negative externalities, SMC > PMC; in positive externalities, SMC < PMC."
26
What is the Coase Theorem?
"The Coase Theorem suggests that bargaining between individuals over property rights will lead to an optimal outcome, regardless of initial property right allocation, as long as transaction costs are minimal."
27
What are the private-sector solutions to externalities?
"Private-sector solutions include: 1. Coase Theorem (bargaining between parties) 2. Mergers (when a single owner controls both the source and affected parties of the externality)"
28
What are the public-sector remedies for externalities?
"Public-sector remedies include: 1. Corrective Taxation (Pigouvian Tax) 2. Subsidies 3. Regulation"
29
What is a Pigouvian Tax?
"A Pigouvian Tax is a corrective tax imposed by the government to internalize negative externalities, raising the private marginal cost to the social marginal cost and reducing overproduction."
30
How do subsidies address positive externalities?
"Subsidies incentivize production in cases of positive externalities by lowering the private marginal cost, encouraging producers to generate more of the socially beneficial good."
31
What are user charges or tariffs in public enterprises?
"User charges are fees for public services that can affect the utility's performance, community welfare, and resource use. They are often based on 'cost recovery' but can serve multiple economic and social goals."
32
What are the common goals in setting tariffs?
"Common goals include: 1. Good Governance 2. Financial Sustainability 3. Distributive Justice 4. Economic Efficiency 5. Fair Pricing"
33
What is the definition of tax?
"A tax is a compulsory levy imposed by the government on individuals and organizations, primarily to raise revenue for executing expenditure programs."
34
What are the two main theories of taxation?
" 1. Benefit Theory: People contribute based on the benefits they receive from the state 2. Ability to Pay Theory: People contribute according to their means or economic capacity"
35
What are the criteria for a good tax system?
"1. Equity (horizontal and vertical) 2. Certainty 3. Convenience 4.Economy 5. Neutrality 6. Simplicity"
36
What are the broad classifications of taxes?
"1. Classification based on Tax Base (Income, Capital, Consumption) 2. Classification based on Incidence (Direct and Indirect Taxes) 3. Classification based on Tax Rate (Uniform, Proportional, Regressive, Progressive)"
37
What are the merits of direct taxation?
"Merits include: 1. Equity 2. Certainty 3. Convenience 4. Known incidence 5. Avoidance of income allocation distortion 6. Flexibility 7. Built-in economic stabilizer"
38
What are the merits of indirect taxation?
Merits include:
1. Universality
2. Limited scope for evasion 3.Psychological palliative
4. Optional nature
5. Flexibility
6. Simplicity
7. Low compliance cost 8. No disincentive to work
9. Political appeal"
39
What is public money creation?
Public money creation involves the government creating money to directly finance expenditure by crediting its account at a central or commercial bank, typically used to stimulate economies or fund public investments.
40
Why might governments create money?
Reasons include:
1. Funding public investments
2. Stimulating economies below full capacity
3. Reducing government borrowing 4. Financing public services without causing inflation when done responsibly
41
Why do governments borrow?
"Governments borrow to: 1. Bridge gaps between tax revenues and spending 2. Meet temporary revenue shortfalls 3. Maintain spending commitments 4. Provide financial flexibility"
42
"What are automatic fiscal stabilisers?"
"During a recession, government tax revenues fall (e.g. people earn less so pay less income tax). The government also has to spend more on unemployment benefits. This means borrowing rises during economic downturns."
43
"Why might a government choose to borrow instead of raising taxes?"
"Political reasons: Voters generally prefer lower taxes and increased spending. Increasing taxes is politically damaging, while borrowing is less politically controversial."
44
"What is the purpose of public debt classification?"
"Economists divide public debt based on use, target, time limit, and terms of payment to understand different types of debt and their characteristics."
45
"List the types of internal and external debt"
"Internal debt: Owed to citizens, floated in the country's capital market
External debt: Owed to foreigners floated in capital markets abroad
46
"What are the problems associated with high government borrowing?"
1. Higher debt interest payments
2. Potential increase in interest rates
3. Crowding out of private sector investment
4. Potential higher taxes in the future
5. Vulnerability to capital flight
6. Potential inflationary pressures"
47
"What is development finance?"
"Efforts to support, encourage, and catalyze economic expansion through public and private investment in physical development, business, and industry, with the goal of achieving sustainable economic growth and reducing poverty."
48
"What are some key development finance programs in Nigeria?"
"1. Agricultural Credit Support Scheme (ACSS) 2. Small and Medium Enterprises Equity Investment Scheme (SMEEIS) 3. Youth Entrepreneurship Development Programme (YEDP)"
49
"What is fiscal stabilization?"
"The government's use of fiscal policy measures to mitigate economic fluctuations, stabilize the economy, and promote sustainable economic growth."
50
"What are the two forms of fiscal stabilization policy?"
"1. Expansionary Fiscal Policy: Lowering taxes or increasing spending to boost the economy 2. Contractionary Fiscal Policy: Increasing taxes or reducing spending to slow the economy and reduce inflation"
51
"What is the fiscal multiplier?"
"A coefficient that indicates how much an increase in fiscal revenue or expenditure affects the equilibrium level of national income. It is based on the marginal propensity to consume (MPC)."
52
"What is public choice theory?"
"The economic study of non-market decision making, applying economic models to understand political decision-making and how public policies are adopted."
53
"What are the key assumptions of public choice theory?"
1. Individuals in politics are rational and self-interested
2. Economic and wealth effects of public policies matter to voters
politicians, and bureaucrats
3. People primarily seek to maximize their self-interest in political settings"
54
Why study public choice?
1. To understand where policies come from 2. To analyze political processes at the individual decision-maker level 3. To improve political institutions and policy-making 4. To predict and understand the consequences of political decisions
55
What is a collective action problem?
A situation that discourages individuals from working together to achieve a common goal, often due to structural issues or free-riding behavior where people believe the goal will be achieved without their individual effort.
56
"How does resource allocation differ between private and public goods?"
Private goods: Allocated through price mechanism, determined by supply and demand
Public goods: Allocated through political process requiring collective decision-making and voting
57
"What are the challenges in allocating public goods?"
"1. Difficulty in comparing different public goods 2. Free-riding problem 3. Varying preferences among citizens 4. Need to balance different group interests 5. Complexity of revealing true preferences"
58
"What are the three roles of government according to Richard Musgrave?"
"1. Allocation: Correcting market inefficiencies 2. Stabilization: Managing macroeconomic concerns like inflation and employment 3. Distribution: Managing income division and resource allocation among citizens"
59
What is collective decision making?
A rule that helps decide which goods to provide in public sector and what taxes to impose. It affects individual welfare and depends on distribution of utilities in the community.
60
What is the Majority Voting Rule?
A common choice process where a group reaches decisions through voting. Requires 50% plus 1 to win. Works well with two options but can be problematic with three or more choices.
61
What is the Condorcet Paradox?
"The generation of social intransitivity based on individual transitivity, where majority preferences can cycle between options making no clear decision possible."
62
What is the Median Voter Theorem?
"States that a majority rule voting system will select the outcome most preferred by the median voter when voters can place alternatives on a one-dimensional spectrum and have single-peaked preferences."
63
What are the two main conditions for the Median Voter Theorem?
"1. Voters can place all election alternatives in a one-dimensional spectrum 2. Voters' preferences are single-peaked (have one most-favored alternative)"
64
What is logrolling?
"The trading of votes to obtain passage of legislative proposals, allowing voters to express intensity of preferences but may lead to minority gains at expense of general losses."
65
What are Arrow's criteria for democratic collective decision making?
"1. Must produce decisions regardless of voter preferences 2. Must rank all outcomes 3. Must be responsive to individual preferences 4. Must be consistent 5. Must be independent of irrelevant alternatives 6. Must not be dictatorial"
66
What is government failure?
"Situation where government intervention does not lead to Pareto efficient allocation of resources, often creating inefficiencies or making market failures worse."
67
What are the main sources of government failure?
"1. Imperfect information 2. Political self-interest 3. High administrative costs 4. Regulatory capture 5. Conflicting policy objectives 6. Lack of transparency 7. Corruption"
68
What is social ownership?
Collective or public ownership of society's assets, resources, or means of production by government or broader community rather than private entities.
69
What are the main forms of social ownership?
"1. State Ownership 2. Cooperative Ownership 3. Community Ownership"
70
What is privatization?
"Transfer of ownership, control, or management of assets, enterprises, or services from public sector to private sector through sale, lease, or contracting out."
71
What are the main objectives of privatization?
"1. Enhance efficiency and productivity 2. Introduce competition 3. Stimulate economic growth 4. Provide fiscal relief"
72
What are the main challenges of privatization?
"1. Need for effective regulation and oversight 2. Concerns about social equity and access 3. Transparency and accountability issues 4. Worker transition and job security"
73
What is regulation?
"Establishing and enforcing rules, standards, and procedures by regulatory bodies to govern behavior of individuals, businesses, or sectors."
74
What are the main types of regulation?
"1. Economic Regulation (entry and price controls)
75
2. Social Regulation (environmental
safety, health)
76
3. Financial Regulation (banking
securities, insurance)"
77
What is self-regulation?
Industry-formulated rules and codes of conduct where industry is solely responsible for enforcement without government involvement.
78
What is co-regulation?
"Situation where industry develops and administers arrangements, but government provides legislative backing for enforcement."
79
What are the three main approaches to regulation?
"1. Command and Control (prescriptive rules) 2. Performance-based (sets standards but allows flexibility in meeting them) 3. Management-based (requires self-regulation through assessment and planning)"
80
What are the main functions of government?
"1. Allocation function 2. Distribution function 3. Stabilization function 4. Regulatory function"
81
What are the two main classifications of regulatory costs?
"Direct costs (compliance costs) and indirect costs (substitution effects, transaction costs, reduced efficiency/competition/innovation, enforcement costs)"
82
What are the main components of regulatory benefits?
"1) Direct benefits: improved wellbeing (health/safety/environment) and market efficiency, 2) Indirect benefits: compliance benefits, macroeconomic benefits, non-monetized benefits"
83
What are the six ultimate impacts of regulatory costs and benefits?
"1) Wellbeing, 2) Happiness, 3) Life satisfaction, 4) Environmental quality, 5) GDP growth, 6) Employment"
84
What is regulatory capture?
"A form of government failure where a regulatory agency created for public interest ends up advancing the interests of the entities it's supposed to regulate, leading to net social loss"
85
List the main ways regulatory capture occurs
"1) Regulators becoming friendly with firms, 2) Asymmetric information, 3) Public sector inefficiencies, 4) Corruption possibility, 5) Under-resourced agencies, 6) Firms pushing for industry regulation"
86
What is perfect competition and its key assumptions?
"A market structure with many firms selling identical products where: 1) All firms are price-takers, 2) No market share influence on prices, 3) Perfect information, 4) Zero cost entry/exit, 5) No government intervention, 6) Free factor movement, 7) Profit maximization goal"
87
What is monopolistic competition?
"A market structure combining monopoly and competitive elements, with many competitors selling slightly different products and low barriers to entry"
88
What are the four main types of product differentiation in monopolistic competition?
"1) Physical product differentiation (size, design, features), 2) Marketing differentiation (packaging, promotion), 3) Human capital differentiation (skills, training), 4) Distribution differentiation (sales channels)"
89
What defines a monopoly and its key characteristics?
"A single supplier controlling an entire market, characterized by: 1) High/no entry barriers, 2) Single seller, 3) Price maker ability, 4) Economies of scale"
90
What is an oligopoly?
"A market structure with more than two but few competitors, high entry barriers, and where actions of one firm significantly impact others"
91
How does competition impact business operations?
"1) Affects barrier to entry, 2) Influences price-setting ability, 3) Impacts business profits through market share and competitive pressure"
92
What are the main benefits of competition?
"1) Lower prices for consumers, 2) Greater innovation, 3) Higher quality products and services"
93
What is competition policy?
"Government measures and regulations to promote and protect market competition, prevent anti-competitive practices, abuse of market power, and entry barriers while fostering innovation, efficiency, and consumer welfare"
94
What are the key objectives of competition policy?
"1) Consumer welfare protection, 2) Efficient resource allocation, 3) Innovation and economic growth promotion, 4) Creating a level playing field for businesses"
95
What are the main elements of competition policy?
"1) Anti-competitive agreements regulation, 2) Abuse of dominant position prevention, 3) Merger control, 4) Market liberalization, 5) Competition advocacy"
96
What causes asymmetric information in regulatory capture?
"Regulators relying on information from firms about prices, costs, and investments, which can lead to biased decision-making favoring the firms"
97
Why do firms sometimes push for regulation of their industry?
"To limit competition and create barriers to entry, often preferring government regulation to free market forces (e.g., railroads supporting Interstate Commerce Act to prevent price discrimination)"
98
How does monopolistic competition differ from perfect competition?
"In monopolistic competition, products are differentiated and firms use marketing to distinguish themselves, while in perfect competition, products are identical and firms are price-takers"
99
What are the key components needed for effective competition policy implementation?
"Political commitment to markets, public education, advocacy campaigns, sufficient resources (human and financial), enforcement body, and administrative instruments"
100
How does competition affect pricing decisions in different market structures?
"Perfect competition: prices set by market, Monopolistic competition: limited pricing power with product differentiation, Monopoly: complete price control, Oligopoly: interdependent pricing decisions"
101
What is the free rider problem in public goods?A situation where people can benefit from public goods without paying for them
leading to under-provision or no provision by the free market
102
How does the extension of property rights help with market failure?It internalizes externalities by ensuring that those who generate negative externalities bear the costs directly
leading to more efficient resource allocation
103
What forms can government subsidies take?Direct government expenditures
tax incentives, soft loans, price support, and government provision of goods and services
104
What are the four primary sources of government regulations?The constitution
statutes, cases, and process and procedures
105
What is redistribution of income and how is it implemented?The transfer of income and wealth from some individuals to others through mechanisms like taxation
welfare programs, public services, land reform, monetary policies, and legal processes
106
How does information asymmetry cause market failure?When one party in a transaction has more information than the other
leading to inefficient market outcomes and requiring government intervention to provide information and ensure information flows
107
What is the difference between excludable and non-excludable goods?Excludable goods are those where people can be prevented from using them if they don't pay
while non-excludable goods (like public goods) can be used by anyone regardless of payment
108
Why might government intervention sometimes fail to improve market efficiency?Due to factors like poor implementation
unexpected behavioral changes, administrative costs, or incomplete information about the market failure
109
What is meant by market power as a cause of market failure?When a firm or group of firms has the ability to influence market prices or output
leading to inefficient outcomes and requiring government regulation
110
How does prohibition differ from regulation as a form of government intervention?Prohibition completely bans certain activities or goods
while regulation sets rules and boundaries for legal behavior without completely forbidding it
111
What role does taxation play in addressing externalities?Taxation can be used to make producers or consumers pay for the external costs they create
helping to internalize externalities and achieve more efficient market outcomes
112
How does government intervention aim to promote competition?Through anti-trust laws
breaking up monopolies, regulating mergers, and creating conditions for new firms to enter markets
113
What is the relationship between equity and efficiency in government intervention?Sometimes these goals conflict
requiring policymakers to balance the desire for fair distribution with the need for efficient resource allocation
114
How can positive discrimination affect market outcomes?By giving advantages to disadvantaged groups
it can alter market allocations and potentially lead to more equitable but possibly less efficient outcomes in the short term
115
What are the three main objectives of government intervention in the economy?
1. Ensuring efficiency in resource allocation2. Enforcing regulation3. Promoting equity
116
What characterizes public goods and why do markets fail to provide them?
Public goods are non-excludable and non-rivalry in consumption. Markets fail to provide them because of the free rider problem, where people can benefit without paying
117
How does government intervention affect individual behavior in two ways?
Through direct effects (when behavior remains unchanged) and indirect effects (when individuals change their behavior in response to the intervention)
118
What must be considered before implementing government intervention?
1. Evidence of market failure must exist2. The intervention must be likely to improve the situation3. The government must have the ability to design and implement an effective intervention
119
Why is the competitive market considered efficient in the absence of market failures?
Because it delivers the amount of goods and services that best meets people's needs and preferences, given scarce resources
120
What is marginal damage (MD) in negative externalities?
"The difference between social marginal cost (SMC) and private marginal cost (PMC). It represents the additional cost imposed on society that isn't captured in the market price."
121
How does negative consumption externality differ from negative production externality?
"In negative consumption externality, SMB curve lies below PMB curve and the externality arises from consumption. In negative production externality, SMC is greater than PMC and the externality arises from production."
122
What are the three main requirements for setting tariffs?
"1. Goals must be explicit and specific2. Each goal needs a pricing rule with only required constraints3. Tariff must have flexible structure to accommodate multiple goals"
123
What is Ramsey pricing?
"A pricing approach that sets usage charges to maximize economic efficiency while ensuring sufficient revenue for public utilities."
124
What is Feldstein pricing?
"A pricing approach that combines economic efficiency and relative equity while ensuring sufficient revenue for public utilities."
125
How should tariffs be set to satisfy multiple goals?
"1. Set usage charges for distributive justice and economic efficiency2. Set fixed charges for sustainability and fairness if additional revenue needed3. Increase/adjust charges at rate consistent with good governance"
126
What distinguishes tax from other levies?
"Unlike fees, licenses, and fines which are paid for specific services or permissions, tax is a compulsory payment that doesn't guarantee any specific benefit in return."
127
What are the purposes of taxation?
"1. Revenue Generation2. Income Redistribution3. Economic Stabilization4. Discourage harmful consumption5. Protect infant industries6. Prevent dumping7. Correct unfavorable balance of payment"
128
What are the main sources of Nigerian Tax Laws?
"1. Constitution2. Legislation3. Court Judgments4. Circulars and Practices of Inland Revenue Officials5. Opinion of income tax experts6. Budgetary pronouncement"
129
What are the key Nigerian tax laws?
"1. Personal Income Tax Act (PITA)2. Companies Income Tax Act (CITA)3. Petroleum Profits Tax Act (PPTA)4. Capital Gains Tax Act (CGTA)5. Value Added Tax Act (VATA)6. Education Tax Act (ETA)7. Stamp Duties Act (SDA)"
130
What are the demerits of direct taxation?
"1. Complexity2. Increasing cost of compliance3. Tax evasion opportunities4. Disincentive effects5. Taxpayer resistance"
131
What are the demerits of indirect taxation?
"1. Regressive nature2. Distortion of consumer preferences3. Distortion of production patterns4. Inflationary effect"
132
What is the difference between average rate of tax and marginal rate of tax?
"Average rate is the total tax payable as a percentage of total taxable income, while marginal rate is the rate paid on successive increments of income or wealth."
133
What are the main Nigerian tax policy objectives?
"1. Pursue low tax regime2. Move from coercive methods to voluntary compliance3. Shift emphasis from income to consumption tax4. Introduce self-assessment5. Reduce tax evasion and avoidance"
134
How does public money creation differ from private sector money creation?
"Public money creation involves government creating money directly for public spending, while private money creation occurs when commercial banks create money through lending. Public creation typically focuses on social benefits rather than financial returns."
135
What conditions help prevent inflation during public money creation?
"1. Economy operating below full capacity2. Money allocated to underperforming sectors3. Supply and demand increasing in tandem4. Careful and responsible implementation5. Focus on productive projects"
136
What is the Youth Entrepreneurship Development Programme (YEDP) in Nigeria?
YEDP offers credit up to N3 million to eligible youth or N10 million for groups of 3-5 youths at 9% interest per annum. It aims to address capital constraints faced by young entrepreneurs.
137
What are the eligible activities for YEDP financing?
Start-ups and expansion projects in agricultural value chains (fish farming, poultry, snail farming), cottage industry, creative industry (tourism, arts and crafts) and Information and Communications Technology (ICT).
138
What is the Agricultural Credit Support Scheme (ACSS)?
A N50 billion initiative by the Federal Government and Central Bank of Nigeria to enable farmers to exploit Nigeria's agricultural potential, reduce inflation, and lower food production costs.
139
How does ACSS interest rate work?
Banks grant loans at 14% interest rate, but applicants who pay back on schedule receive a 6% rebate, reducing effective interest rate to 8%.
140
What is the Small and Medium Enterprises Equity Investment Scheme (SMEEIS)?
A voluntary initiative requiring banks to set aside 10% of their Profit After Tax for equity investment in small and medium enterprises.
141
What is the difference between funded and unfunded debt?
Funded debt is long-term debt with marketable securities and a separate repayment fund. Unfunded debt is short-term with no separate repayment fund.
142
What is the difference between redeemable and irredeemable debt?
Redeemable debt has a promised repayment date for principal, while irredeemable debt only pays regular interest with no principal repayment promise.
143
What is productive vs. unproductive debt?
Productive debt generates income (like infrastructure loans), while unproductive debt doesn't create assets or generate income (like war loans).
144
What is the balanced-budget multiplier?
When government expenditure and taxes both rise by the same amount, the multiplier effect equals one - national income rises by only that amount.
145
How does the crowding out of investment work?
When government deficit increases, it must be financed through private sector savings, potentially reducing private investment. However, increased income can generate new savings to finance the deficit.
146
What are the conditions when fiscal multiplier is higher than normal?
"1. Large proportion of liquidity-constrained consumers2. Policy interest rate at zero lower bound3. Less open economy4. Economy in recession"
147
How is the fiscal multiplier calculated?
Fiscal Multiplier = 1/(1-MPC), where MPC is the marginal propensity to consume.
148
What are the bedrock tools in development finance?
The enormous debt market known as bonds, which forms the foundation of public finance in developed countries.
149
What are targeted tools in development finance?
Tools that target specific geographic areas through tax increment finance, special assessment districts, and tax abatements.
150
What is the effect of public debt on income distribution?
Depends on which income groups bear debt costs and which receive the benefits. If taxpayers and lenders are different groups, it can lead to income redistribution.
151
What are the methods of debt redemption?
"1. Repudiation (writing off loans)2. Refunding (issuing new bonds)3. Conversion (converting high-interest to low-interest debt)4. Capital levy5. Sinking Fund6. Surplus budget"
152
What is the framework for public debt management?
"1. Debt Management objectives2. Transparency and Accountability3. Institutional Framework4. Debt security and Risk Management5. Efficient Market for Government Securities"
153
How does expansionary fiscal policy affect aggregate demand?
"It increases aggregate demand through:1. Increasing consumption via tax cuts2. Increasing investments via business tax cuts3. Increasing government purchases4. Raising federal grants to state/local governments"
154
What factors should influence the decision to tax or borrow?
"1. Benefit Received Principle2. Inter-generational Equity3. Efficiency considerations4. Impact on future generations5. Current economic conditions"
155
What are the main categories of development finance tools?
"1. Bedrock Tools (bonds)2. Targeted Tools (tax increment finance)3. Investment Tools (tax credits)4. Access to Capital Lending Tools5. Support Tools (federal funding)"
