Fiscal policy

Question 1

Fiscal policy

Answer 1

changes to taxes, expenditure, and borrowing that are intended to control the level of economic activity.

Question 2

Expansionary fiscal policy

Answer 2

changes to taxes, expenditure and borrowing that aim to increase the level of economic activity (increase govt spending/borrowing, reduce taxation)

Question 3

What are the two macro effects of fiscal policy?

Answer 3

Influences SR output gap, and increases productive capacity

Question 4

What are the two micro effects of fiscal policy?

Answer 4

Provides public and merit goods
Discourages demerit goods
manages income distribution

Question 5

Contractionary fiscal policy

Answer 5

changes to taxes, expenditure, borrowing that aim to reduce the level of economic activity. (reduce govt spending/ borrowing, increase taxation)

Question 6

CHAIN: reduction in income tax

Answer 6

increase in disposable income, increases marginal propensity to consume, increase in discretionary consumption, consumption accounts for about 60% of AD, so causes AD to shift outward, extended by multiplier effect

Question 7

CHAIN: Reduction in govt. expenditure

Answer 7

direct impact on AD, inward shift of AD, extended multiplier effect

Question 8

Classical argue that expansionary fiscal policy

Answer 8

• limited in its effectiveness bc of inflationary impacts
• positive impacts of economic growth is limited to the SR
• High long term inflation risk unless productive capacity expands (LRAS outwards shift)

Question 9

Fiscal policies that can improve productive capacity will cause

Answer 9

LRAS to shift outwards/increase

Question 10

Fiscal policies that improve productive effciency examples

Answer 10

• Build new schools
• Extend high speed broadband network
• invest in HS2 rail link
• Build new roads

Question 11

Keynesian graph for fiscal policy - expansionary (consider what it depends on, and how this impacts the graph)

Answer 11

A lot of spare capacity then increase in AD increases national output without inflationary pressures in the SR.

Little spare capacity then increase in AD increases national output but with inflationary pressures in SR

Question 12

Classical graph for fiscal policy- expansionary

Answer 12

In SR there will be inflationary pressures and increase in output if AD increases.

In the LR there will be only inflationary pressures much greater than SR and no increase in output - LR Risk!

Question 13

Classical and keynesian agree- expansionary fiscal policy

Answer 13

that there is a high long term inflation risk unless productive capacity increases as well when AD also increases.

Question 14

CASE STUDY: Fill in

From 2010 to 2019 ___________ tax in UK decreased by ____ although in theory this would shift________ to the _______ this was delayed from uncertainties such as ______ and the US-China trade war. Therefore disregarding the ceteris paribus assumption, economic theories do not always manifest in the real world

Answer 14

corporation, 9%, LRAS, Brexit

Question 15

CASE STUDY: Fill in

Sri Lanka has a high level of national debt over ____ __ ___ ___ and has been running large fiscal deficits further fuelling the debt issue.

Answer 15

120% of its GDP

Question 16

CASE STUDY: Fill in

Sri Lanka _________ on its debt, becoming the _____ asian economy to do so in 20 years leading to significant _________ costs. For instance bond yield spiked above 30% between 2022 to 2023.

Answer 16

defaulted, first, borrowing

Question 17

CASE STUDY: Fill in

Sri Lanka negotiated a $3bn bailout deal with the ___ International Monetary Fund to restructure its debt. The IMF in return insist on fiscal austerity

e.g.

• ____ in state sector ________
• Higher _____
• Cuts in energy ________
• Anti corruption measures

Answer 17

IMF, Cuts, salaries, taxes, subsidies

Question 18

Further reading: Fill in

Alternative policy that achieves fiscal goal (i.e. reduce national debt) is ________ repression, where funds are chanelled from savers to the _______ as a method to erode the value of national debt.

GOVT:
- set interest rates lower than market eq to make it cheaper for them

• boosts inflation to make repayment with money in real terms worth less than the borrowed amount

NOTE: this policy was first used after ___

Answer 18

financial repression, goverenment, WW2

Question 19

EV OF FINANCIAL REPRESSION:

Savers lose out seen as ____ __ ______ is low and this may make this policy unfair as savers do not benefit from it whilst the government reaps benefits from it.

Answer 19

rate of return

Question 20

what was the ‘nice’ decade?

Answer 20

“Nice” stands for “non-inflationary consistently expansionary”, an expression used by the Governor of the Bank of England, Mervyn King.

Which describes the period in the early 1990s