fiscal policy Flashcards
what is fiscal policy?
refers to the way the government alters the levels of tax and government spending in the budget to alter the level of economic activity
what did keyne’s say about using fiscal policy?
using it in a countercyclical fashion to stabilise fluctuations in the business cycle
what are the purposes of the budget?
- how revenue will be raised
- redistribution of income
- manage macroeconomic activity
when is the budget in surplus?
if total revenue is larger then spending
when is the budget in deficit?
when revenue is less than spending
what are the three ways in which the government finances the budget deficit?
selling bonds, borrowing from the central bank, borrowing from overseas
what is crowding out?
when there is an increase in interest rates across the market (impacting on consumers and producers, because government borrowing creates higher demand for credit in financial markets), a competition for loanable funds
what are automatic stabilisers?
changes in government revenue and expenses that occur naturally to reduce the size of flucuations in the business cycle without any direct govt action being taken
automatic stablisers work to:
increase leakages, decrease injections in an upswing and the opposite in a downswing
when does expansionary fiscal policy occur?
during a downturn when UE is rising and inflation is low
how does the govt employ expansionary fiscal policy?
by reducing tax or increasing govt spending
why does the government employ expansionary fiscal policy?
to stimulate economic activity, restore confidence, create jobs and increase economic growth
what is the anticipated effect of expansionary fiscal policy?
increase in AE
when is contractionary fiscal policy used?
during an upswing or boom
how does the govt employ contractionary fiscal policy?
increase tax or reduce government spending
