Fiscal policy Flashcards
Fiscal policy
changes to taxes, expenditure, and borrowing that are intended to control the level of economic activity.
Expansionary fiscal policy
changes to taxes, expenditure and borrowing that aim to increase the level of economic activity (increase govt spending/borrowing, reduce taxation)
What are the two macro effects of fiscal policy?
Influences SR output gap, and increases productive capacity
What are the two micro effects of fiscal policy?
Provides public and merit goods
Discourages demerit goods
manages income distribution
Contractionary fiscal policy
changes to taxes, expenditure, borrowing that aim to reduce the level of economic activity. (reduce govt spending/ borrowing, increase taxation)
CHAIN: reduction in income tax
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
CHAIN: Reduction in govt. expenditure
direct impact on AD, inward shift of AD, extended multiplier effect
Classical argue that expansionary fiscal policy
- 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)
Fiscal policies that can improve productive capacity will cause
LRAS to shift outwards/increase
Fiscal policies that improve productive effciency examples
- Build new schools
- Extend high speed broadband network
- invest in HS2 rail link
- Build new roads
Keynesian graph for fiscal policy - expansionary (consider what it depends on, and how this impacts the graph)
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
Classical graph for fiscal policy- expansionary
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!
Classical and keynesian agree- expansionary fiscal policy
that there is a high long term inflation risk unless productive capacity increases as well when AD also increases.
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
corporation, 9%, LRAS, Brexit
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.
120% of its GDP
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.
defaulted, first, borrowing
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
IMF, Cuts, salaries, taxes, subsidies
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 ___
financial repression, goverenment, WW2
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.
rate of return
what was the ‘nice’ decade?
“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
