Fiscal Policy Flashcards
Fiscal Policy
Government adjusts gov. expenditure and/or taxation to meet economic objectives
Current Expenditure
Daily payments required to run the public sector.
Capital expenditure
Long-term investments
Transfer payments
Payments sent to people without any return.
Recession
a decrease in real GDP over 2 consecutive quarters
Sources of government revenue
- Direct and indirect taxation
- Sale of goods and services from state-owned enterprises
- Sale of government assets
Common expenses of government revenue
- Current expenditures
- Capital expenditures
- Transfer payments
Keynesian Multiplier
An initial injection of money into the economy results in a proportionately larger increase in Aggregate Demand.
strengths of fiscal policy
- Target specific economic sectors
- Boost confidence
- Include automatic stabilizers to reduce business cycle fluctuations
weaknesses of fiscal policy
- Political pressure
- Time lags
- Crowding out
Automatic stabilisers
Fiscal policies that naturally reduce fluctuations of the business cycle.
Examples of automatic stabilisers
Progressive taxes
Unemployment benefits
Crowding out
When government spending fails to increase overall aggregate demand because higher government spending (due to borrowing) causes an increase in interest rates, resulting in an equivalent fall in private sector spending (C ) and Investment ( I)
