Fiscal policy

Question 1

Define demand side policy

Answer 1

Policy designed to affect aggregate demand: fiscal policy and monetary policy

Question 2

Define supply side policy

Answer 2

Policy designed to affect aggregate supply: policies to affect costs of productivity. Changing the factors of production in some way

Question 3

If policy is being implemented to shift the demand curve what direction do we want it to shift? Why is policy needed?

Answer 3

Wanting to move demand to the right and supply to the right typically. Always want demand increasing but sometimes we may want to slow the increase in demand, gradual increase in demand

Question 4

Name the two types of demand policies one can have and outlien the difference betwene them

Answer 4

Fiscal policy and monetary policy

Difference is really in who is doing it. Remit of governments vs remit of central banks

Question 5

Define fiscal policy

Answer 5

Policy to affect aggregate demand by altering government expenditure and/or taxation. Government flows in the circular flow of income

Question 6

Define monetary policy

Answer 6

Policy to affect aggregate demand by altering the supply of money in the economy or manipulating that rate of interest

Question 7

Define Expansionary (relationary) fiscal policy

Answer 7

Fiscal policy designed to increase the rate of growth of aggregate demand - raising government expenditure or reducing taxes

Question 8

Define Contractionary (deflationary) fiscal policy

Answer 8

fiscal policy designed to reduce the rate of growth of aggregate demand (prevent overshoot dampen the peaks and troughs of the business cycle) - cutting government expenditure or raising taxes - opposite to above

Question 9

What are the two functions of fiscal policy and explain

Answer 9

Correct fundamental disequilibrium - structural problem to correct
Fine tuning - Smooth out cyclical fluctuations in the economy. Trying to put some controls around the peaks and troughs of the natural business cycle. Here deflationary fiscal policy is applied

Question 10

What is the difference between deficit and debt in terms of countries budget

Answer 10

Deficit is what we’ve done this year how much better or worse we’ve made situation
Debt is accumulated aggregate of what we still have outstanding

Question 11

What is meant by the budget equation

Answer 11

To what extent the government has a viable option to move on expenditure or taxes

Question 12

What is the primary aim of the EU in fiscal policy

Answer 12

EU wants a common approach to avoid national problems becoming eurozone problems
Also wants to avoid massive swings that require massive corrections (fine tuning idea)
Sets objectives for countries: Ireland’s medium-term budgetary objectives: a structural budget deficit of -0.5% of potential GDP.

Question 13

Define Fiscal space

Answer 13

Fiscal space is an estimate of the scope for future spending increases or tax cuts possible while complying with the domestic and EU fiscal rules
Its a small piece but essential piece of dicussions about budget

Question 14

What are the uncertainties surrounding the idea of a fiscal space

Answer 14

Interaction of fiscal rules
Actual budgetary stance in future years
Revisions to relevant data - as time goes on predictions become more realistic

Question 15

Explain and name two automatic fiscal stabilisers

Answer 15

Tax stabilisers: Rise in withdrawals in the circular flow of income
Benefit stabilisers: Reduction in Injections in the circular flow of income

Question 16

What problems of magnitude can arise in fiscal policies

Answer 16

Predicting the effect of changes in expenditure
Predicting the effect of changes in taxes
Predicting the resulting multiplier effect
Random shocks

Question 17

What problems of timing can arise in fiscal policy

Answer 17

Recognition of problem
Planning and execution
Multiplier and accelerator
Destabilising - even well thought police can be a really bad idea if you miss understand where you are in the economic business cycle