Fiscal Policy Flashcards by Hannah Foley

examples of fiscal policy during recession

taxes go down

government spending increases

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the aim of fiscal policy during a recession is to shift the aggregate demand curve in what direction

to the right (expand)

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examples of fiscal policy during expansionary periods

taxes go up

government spending goes down

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the aim of fiscal policy during an expansion is to shift the aggregate demand curve in what direction

left (back down)

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formula for national savings

Y - T - C + ( T - G )

private savings of households - public savings

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what is government revenue made up of

taxes

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what is public savings

T - G

the amount of money that the government has left after spending

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what are private savings

Y - T - C

The amount of income that households have after paying their taxes and consumption

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if tax revenue is greater than government spending, the government has a budget…

surplus

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if tax revenue is less than government spending, the government has a budget…

deficit

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how can government get more money if theyre in a deficit

borrow to cover expenditure

take out of savings

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deficits build up and become

debt

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how can deficits be justified

spending on health, education and public services may have been needed, not bad investments

spending now can boost growth in future eg motorway and infrastructure increases jobs and business

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what is debt usually compared to

gdp

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what is the EU target of national debt

60%

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how has irish debt changed over time since 1994

1994 - 2007 we had steady debt with surpluses as often as deficits

after 2007, there was a big increase in debt

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where does most government spending focus on

the young
old
unemployed

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how can countries be left with large deficits after ating too early

acting too early in an expansionary period, the current government revenue will not be permanent but the money committed to be spent will be needed to be paid back over many years

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how could ireland consider rising its taxes to raise more government revenue

higher taxes for higher earners

increase property tax

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what is autonomous consumption

even without income, people will use their savings to consume

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in the Keynesian cross what is the equilibrium line

where expenditure = national income

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what type of relationship is there between expenditure and national income

positive, meaning if national income increases, people will consume more and as people consume more, national income increases and so on

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what is the deflationary gap

the difference between potential and actual output of the economy

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why might there be a deflationary gap

resources not being used effectively
fall in consumer spending
few business investment
fall in exports

what is the basis of the Keynesian cross

that government can influence AD through fiscal and monetary policy

what does MPC stand for

marginal propensity to consume

what is MPC

for each new dollar of income, what is spent on consumption

what does MPS stand for

marginal propensity to save

what is MPS

for each new dollar of income, what is saved

what will MPS + MPC be

explain how the multiplier effect works with government spending

if government spending increases, so will GDP as this spending is consumption for some citizens eg construction workers, whoever receives the benefits as a result, consumption will rise and because of that, GDP rises and so on

what is the multiplier formula for government spending

1 / 1-MPC

If the MPC was 0.75 and the government increased spending by 100 what would AD increase by

1/(1-0.75) 1/0.25 4 100x4=400

explain how the multiplier effect works with government taxes

if taxes decrease, households will have more take home pay and so their consumption will increase GDP will increase because consumption increased and this goes on in that cycle

what is the tax multiplier formula

-MPC / (1-MPC)

If the government were to decrease taxes by 100, what would the effect be on AD, mpc = 0.75

-0.75/(1-0.75) -3 100x3 300

which has a more direct impact on boosting AD reducing Taxes increasing government spending

increasing government spending

which effects AD less decreasing taxes increasing government spending

decreasing taxes

If the government were to increase taxes by 100, what would the effect be on AD, mpc = 0.75

-0.75/(1-0.75) -3 100x3 300 AD decrease by 300

are multipliers unique to government spending

no, multiplier effects are also relevant for NX and I but the government can control government spending directly

what is crowding out

when private investments reduce due to high interest rates casused by government spendinf

why is crowding out caused

when government spending increases, the interest rate increases and so private firms have less incentive to borrow moneu to make investments as itll turn out to be more expensive

does multiplier effect apply to private investments

yes

Pros of government policy

smooths fluctuations | multiplier effect

Cons of government policy

should be all the time not just to smooth out cyclces crowding out potential debt how much is being spent on imports

if the government spends money on foreign imports where will the multiplier effect be

in the foreign economy

example of why fiscal policy is needed as well as monetary policy

monetary policy can be limited eg interest rates are 0 and cant be lowered any further fiscal policy has more of a direct effect on people's lives

best time for government to save money & pay off debts

in years of expansion

which can be implemented more quickly: fiscal policy monetary policy

monetary policy

why cant fiscal policy be implemented as quickly as fiscal policy

need to hire people need approvals so on

why does an aging population cause an increase in government spending

more costs on pensions, medical care etc | shrinking labour force

what happens when a country continues to borrow but never pays back

countries will stop lending

how could an economy shift both AD and LRAS together

foreign investment develops net exports (AD) shifts LR AS as quantity of resources in the economy has also increased

how would AD and AS change in Brexit without fiscal policy

Initially SR AS shifts down SR AS could shift back up on its own as alternative supply chains are established However this may not happen meaning there would be a permanent effect on supply (LRAS), having a negative effect on growth in the economy

how would AD and AS change in Brexit with fiscal policy

Initially SR AS shifts down Government spending could push the AD back up in order to read the LR equilibrium again could cause inflationary problems

how does the government know how much to increase government spending by to reach the long run equilibrium again

use the multiplier

how would AD and AS change in Covid-19 crisis with no fiscal policy (assuming that shops can open)

initially negative demand shock SRAS shifts to the right to go back to LR equilibrium Firms will slowly adjust their prices and wages Negative effect on growth

how would AD and AS change in Covid-19 crisis with fiscal policy (assuming that shops can open)

initially negative demand shock however the AD curve shifts back up due to government spending Minimize effect on growth