Fiscal Policy Flashcards
What is fiscal policy
The use of government spending, taxation or government borrowing to affect the level of economic activity
What method does the government use to manage AD
Counter cyclical way
The government does the opposite to what is currently happening in the private sector
What types of budget balances are there
Structural
Cyclical
What is structural budget imbalances
When governments deliberately budget an imbalance as an expansionary or contractionary policy
What is cyclical budget imbalances
When the position of the economy in the trade cycle affects the position of the balance
What are automatic stabilisers
They are the features that smooth out the trade cycle
They are transfer payments and progressive income tax
What are transfer payments
Payments by the government on the basis of assessed needs and current income
What is a budget deficit
When the government spend more than they collect in tax and they to borrow
What happens when the government doesn’t pay off the budget deficit
It becomes part of the national debt
What budget position does the UK normally run
Deficit
What is a budget surplus
It is when the government collect more money from tax than spend
How does the government borrow money
By selling bonds
What is the equation for debt burden
National debt / GDP x100
What is crowding out
When the government increases interest rates to make their bonds look more attractive but means that people spend and invest less
What is one of the problems with national debt
Crowding out
What is austerity
The painful process of trying to bring stability back to public finances
What policies are used during austerity
Increased taxes
Cuts in gov spending
What is the pro austerity argument
Crowding out
Big projects after debt is payed
What is the anti-austerity argument
Cutting G or increasing T could cause AD to decrease and lead back into recession
Increase GDP instead
How can the national debt be dealt with
Stabilise the size of the debt - allow inflation to erode real value
Cut Gov spending -
Increase tax revenue
Increase Economic growth - reduces cyclical debt
When is expansionary policy used
In a recession
When is contractionary policy used
In a boom
What are expansionary fiscal policies
Increase G
Decrease T
Borrow money and spend it
What side effects are there from expansionary policy
Increase in general price level
What are contractionary fiscal policies
Increase T
Decrease G
What is the side effect of contractionary policies
Falling output
Falling income
Rising unemployment
What are government bonds
A loan for the government and is a paper contract or I.O.U to repay the loan
What is a bonds nominal value
The amount of money originally lent to the government
What is the redemption date
When the original sum of money is repaid to the holder of the bond
What is the coupon or fixed income of a bond
It is income paid annually to the bondholder
When does the government sell bonds
When they need to finance their budget deficit
What is the supply of loans
Any person that has spare income they dont spend
What is the demand for loans
Any person who wants to spend more than it earns
What are the main credit rating agencies
S&P
Moody’s
Fitch
What are credit scores
The rating a government or person is given based on the likelihood that the debt is repaid
