Fiscal Policy

Question 1

What is a fiscal policy

Answer 1

• the manipulation of the level, composition, and allocation of government taxation and expenditure
• to influence national AD

Question 2

What are automatic stabilisers

Answer 2

• the elements of government policy that countertbalance changes in economic activity and demand without government action
• e.g -> unemployment benefits when in a recession to boost economic activity

Question 3

Discretionary fiscal policy

Answer 3

• the deliberate actions of the government to change the level and composition of taxes / GSpending to directly influe AD
• e.g -> gvrnment investment in infrastructure

Question 4

Non-discretionary fiscal policy?

Answer 4

• the automatic built-in responses to cyclical changes in economic activitiy
• e.g progressive taxation system that collects more income during “boom” periods to slow EG

Question 5

Ways to fund a deficit budget

Answer 5

• borrowing from the private sector through selling commonwealth government securities
• borrowing from the RBA
• borrowing from the foreign sector by selling securities and buying foreign $ to add to its reserves

Question 6

What does the government spend the surplus budget on?

Answer 6

• repaying debt from the private sector
• repaying debt from the foreign sector
• saving to fund future government expenditure or reduce taxation

Question 7

What is the deflationary gap?

Answer 7

• when AD is less than AS at the full employment level of income
• results in the eventual rise in the rate of unemeployment

Question 8

What is the inflationary gap

Answer 8

• when the AD exceeds AS at the full employment level of income
• results int he eventual rise in the price level + inflation rate

Question 9

What are the 4 types of taxation?

Answer 9

• income taxation - direct
• company taxation - direct
• GST - indirect
• customs taxation - imports

They can be direct and indirect

Question 10

What are the three forms of taxation?

Answer 10

Proportional:
- each person pays a fixed percentage of their wage to the gvrnment

Progressive:
- as wages increase, the proportion of income which is taxed increases - vice versa

Regressive:
- as wages decrease, the proportion of taxation is increased - vice versa

Question 11

What are the three types of government expenditure

Answer 11

• government current spending - G1
• government capital spending - G2
• transfer payments

Question 12

What is G1

Answer 12

• the wages/salaries of employees in government owned sectors
• allows g/s to be purchased from private sector

Question 13

What is G2

Answer 13

• the investment in national, social, and economic infrastructure
• grows productive capacity –> increases living standards

Question 14

What are transfer payments

Answer 14

• expenditure on social securities and welfare benefits to the neediest individuals in society

Question 15

What are the four general principles that contribtue to the effectives of fiscal policiy?

Answer 15

• inflationary expectations
• inside lag
• outside lag
• policitical constraints

Question 16

Describe inflationary expectations?

Answer 16

• qualitative economic indicators which refer to the opinion that households and firms have for the future rate of inflation
• influenced by past inflationary periods and factors in their saving, purchasing and investing decisions

Question 17

Describe inside and outside lag?

Answer 17

Inside:
- the time it takes to recognise that the state of the economy indicates that the need to use counter-cyclical MaEP + decide on appropiate policy and implement it

Outside:
- the time it takes for the policy to have its effect on the targetted economic indicators and level of EA

Question 18

Describe political constraints

Answer 18

• the limations on gvrnment policy actions resuilting from the need to tailor polciies to be politically advantageous