Fiscal policy Flashcards
What is the budget
A financial plan that the government publishes every year
What are the 3 approaches to taxation
Progressive
Proportional
Regressive
What is a balanced budget
When the tax revenue from the year is equal to the amount the government spends in its budget
How does the government fund a budget deficit
By selling bonds to financial institutions
What is the structural deficit
The part of the deficit that is not related to the state of the economy
What is a cyclical budget deficit
The part of the deficit that changes due to fluctuations in tax revenue and spending
What is crowding out
The reduction in private sector investment due to increased public spending
When may the negative effects of crowding out not have an effect
If the economy is weak and business confidence is low
What causes crowding out
Increased government borrowing pushes up the return on bonds meaning that less is invested in the private sector
How could the government target a budget deficit
Austerity
What are the 4 main reasons against using expansionary fiscal policy
Relies on a good government
Crowding out
Higher taxes result in people working less
Increases the size of the national debt
What is a laffer curve
A curve showing how tax revenue decreases after taxes are raised to high due to tax avoidance
What are the factors effecting the effectiveness of fiscal policy
The size of the multiplier
Describe how crowding out leads to inflation
When the government increases spending, it increases the demand for goods and services. This causes demand pull inflation
How does deflationary fiscal policy disincentive workers
Higher tax rates means that the marginal reward for working is decreased
