FISCAL POLICY Flashcards
What are the main features of expansionary FP?
Increase G
Decrease T
AD shifts right
Budget deficit, G>T
When is expansionary FP likely to be used?
In a recession or where there’s a negative output gap
What is the impact of expansionary FP on macroeconomic objectives?
Improve economic growth
Decrease unemployment
Increase inflation
Worsen the current account on the balance of payments
What are the main features of deflationary FP?
Decrease G
Increase T
AD shifts left
Budget surplus, T>G
When is deflationary FP likely to be used?
In a boom or where there is a positive output gap
What is the impact of deflationary FP on macroeconomic objectives?
Decrease economic growth
Increase unemployment
Decrease inflation
Improve the current account on the balance of payments
What factors affect Government expenditure?
Size and structure of a country’s population
Governments political views on inequality, poverty, redistribution of income etc
What problems can a budget deficit cause?
Demand pull inflation
Can Increase interest rates which decreases investment
A Large national debt decreases FDI
What problems can a budget surplus cause?
If T is too high or G is too low this can harm and constrain economic growth
What is the main fiscal rule?
Government can borrow to invest in the long term in things like infrastructure but not fund current expenditure like wages
What positive effects do fiscal rules have?
Promote future growth and helps the government achieve economic stability
Increase business and consumer confidence
Benefits all 3 economic agents
Who helps enforce fiscal rules?
The OBR, set up in 2010
How can expansionary FP help tackle poverty?
Benefits - help the unemployed
Provision of healthcare and education - reduce future property and improve country’s human capital
Progressive tax - reduce gaps between people’s RDI
What are some examples of expansionary FP?
Tax cuts, transfer payments, rebates, increased G on infrastructure
What countries have an old population?
Japan and germany
