Fiscal Policy Flashcards
What is the difference between fiscal and monetary policy?
Fiscal refers to government decisions about taxation and spending, whereas monetary policy refers to central bank activities that are directed toward influencing the quantity of money and credit in an economy.
What are government deficits?
Difference between government revenues and expenditures over a period of calendar time.
What is fiscal policy?
It involves the use of government spending and changing tax revenue to affect certain aspects of the economy, such as the overall level of aggregate demand.
What are four tools available to a government?
Transfer payments, current government spending, capital expenditures, and taxes
What is an indicator of a government’s fiscal stance?
Structural budget deficit
Why do the decisions made by government have an enormous impact on economies? 2 reasons
Public sectors of most developed economies normally employ a significant proportion of the population, and they usually are responsible for a significant proportion of spending in an economy.
Also, governments are the largest borrowers in world debt markets.
Government policy is ultimately expressed through its borrowing and spending activities!
What is monetary policy?
Refers to central bank activities that are directed toward influencing the quantity of money and credit in an economy.
What is fiscal policy?
Refers to government’s decisions about taxation and spending. Both monetary and fiscal policies are used to regulate economic activity over time.
What is the overarching goal of monetary and fiscal policy?
Creation of an economic environment in which growth is stable and positive and inflation is stable and low.
What 3 aspects is fiscal policy focusing on?
Overall level of aggregate demand in an economy = level of economic activity.
Distribution of income and wealth among different segments of the population.
Allocation of resources between different sectors and economic agents.
What is aggregate demand?
The amount companies and households plan to spend.
How can fiscal policy influence aggregate demand?
Expansionary policy:
- cuts in personal tax income raise disposable income with the goal of boosting aggregate demand.
- cuts in sales taxes to lower prices raise real incomes with the goal of raising customer demand.
- cuts in corporation taxes to boost business profits may raise capital spending.
- cuts in tax rates on personal savings to raise disposable income.
- new public spending on social goods and infrastructure boost personal incomes.
INFLUENCE OF THESE RELATIONSHIPS VARIES!
What are the two economist views on fiscal policy?
Keynesians believe that fiscal policy can have powerful effects on aggregate demand, output and employment when there is substantial spare capacity in an economy.
Monetarists believe that fiscal changes only have a temporary effect on aggregate demand and that monetary policy is a more effective tool for restraining or boosting inflationary pressures.
What is the opposite of expansionary policy?
Contractionary policy (reduce spending and increase taxes)
How is a government budget surplus or deficit an indicator for a tighter or looser fiscal policy?
An increase in budget surplus would be associated with contractionary fiscal policy, while a rise in a deficit is an expansionary fiscal policy.
What is an automatic stabilizer?
A fiscal mechanism that counteracts economic fluctuations without direct government action. Examples include progressive taxes and unemployment benefits, which adjust automatically to stabilize demand during recessions and slow overheating during booms.
What is the “pay-as-you-go” rule in fiscal policy?
Neutral fiscal policy because any increases in spending or reductions in revenues would be offset.
What is government debt and how is it financed?
Accumulation of budget deficits over time. It is financed by borrowing from the private sector.
What is crowding out?
Government borrowing may divert private sector investment from taking place. If there is a limited amount of savings to be invested, then larger government demands will lead to higher interest rates and lower private sector investing.
What are transfer payments?
Welfare payments made through the social security system and, depending on the country, include payments for state pensions, housing benefits, tax credits and income support for poorer families, child benefits, unemployment benefits, and job search allowances.
They exist to provide a basic minimum level of income for low-income households, and they also provide a means by which a government can change the overall income distribution in a society.
Are transfer payments included in GDP?
No, because they do not reflect a reward to a factor of production for economic activity.
What is current government spending?
Spending on goods and services that are provided on a regular, recurring basis - including health, education, and defense.
What is capital expenditure?
Includes infrastructure spending on roads, hospitals, prisons, and schools.
What are two forms of government revenues?
Direct taxes are levied on income, wealth and corporate profits and include capital gains taxes, national insurance, and corporate taxes. Also, local income, property tax and inheritance tax.
Indirect taxes are taxes on spending on a variety of goods and services in an economy - such as the excise duties on fuel, alcohol, and tobacco as well as sales.
What are two goals of taxes?
Raising revenues to finance expenditures.
Income and wealth redistribution policies.
What are four desirable attributes of a tax policy?
Simplicity
Efficiency (little interference in individual decision making in market)
Fairness (progressive taxation)
Revenue sufficiency
What is excise duty?
Excise duty is a tax on the manufacture or sale of specific goods like alcohol, tobacco, and fuel, aimed at raising revenue and regulating consumption.
What is the structural budget deficit?
The deficit that would exist if the economy was at full employment.
Recognition lag, action lag, impact lag.
What is the fiscal multiplier and how to calculate it?
The fiscal multiplier measures the impact of government spending or tax changes on GDP.
1 / (1 - c)(1 - Tax)
What is the Ricardian equivalence?
Individuals are anticipating future taxes correctly.
