Fiscal Policy Flashcards
What are the macroeeconomic objectives?
Full employment- natural rate of unemployment is 4% in the UK
Price stability - low inflation
A high and sustainable rate of economic growth
Keeping the balance of payments in equilibrium
What is the role of the government ?
It is to maintain law and order
It is to help correct market failures
To provide public services not provided in a free market
What is the business cycle?
It describes the rise and fall in production output in production output of goods and services in an economy. Generally measured using rise and fall in real inflation
What is fiscal policy ?
Fiscal policy is the means by which a government adjusts its borrowing and spending levels and tax rates to monitor and adjust AD influence is a nation’s economy.
What are the two types of fiscal policy ? And what is the difference?
Expansionary and contractionary
Expansionary fiscal policy helps speeds up the economy
Contractionary fiscal policy helps slow down the economy
What are transfer payments?
A payment made or income received in which no goods or services are being paid for, such as a benefit payment or a subsidy
What are the different types of tax? Explain them
Progressive tax - a type of tax that takes a larger percentages or income from tax payers as their income rises
Regressive tax - not based on ability to pay eg VAT
What is the difference between budget deficit and national debt?
Budget deficit is the annual borrowing requirement of the government
National debt is the total level of public sector debt built over previous years
How do governments fund deficit and national debt?
Money from taxes and from interest payments
What is the difference between expansionary and contractionary fiscal policy ?
Expansionary is used to help speed up the economy eg lowering taxes, new projects which increase spending and stimulates the economy , increasing budget deficit
Contractionary is used to slow down economic growth
Increasing taxes to slow down spending
What are automatic fiscal stabilisers?
,
What is a negative output gap?
The output gap is the difference between the actual levels of GDP and its estimated potential level. It is usually expresses as a percentage of the level of potential output
Factor resources are under utilised
Explain the multiplier
An initial change in aggregate demand has a much greater final impact on the level of equilibrium national income
Comes about because of injections of new demand for goods and services in to the circular flow of income stimulate rounds of spending
What is crowding out?
A situation when increased interest rates leads to a reduction in private investment spending such that it dampens the initial increase of total government spending
When government spending fails to increase overall aggregate demand because higher government spending causes and equivalent fall in private sector spending and investment
Give lags of fiscal policy
Recognition lag ,
Legislative/administrative lag
Effectiveness lag
