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Economics > Fiscal Policy > Flashcards

Fiscal Policy Flashcards

1
Q

examples of fiscal policy during recession

A

taxes go down

government spending increases

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2
Q

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

A

to the right (expand)

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3
Q

examples of fiscal policy during expansionary periods

A

taxes go up

government spending goes down

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4
Q

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

A

left (back down)

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5
Q

formula for national savings

A

Y - T - C + ( T - G )

private savings of households - public savings

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6
Q

what is government revenue made up of

A

taxes

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7
Q

what is public savings

A

T - G

the amount of money that the government has left after spending

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8
Q

what are private savings

A

Y - T - C

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

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9
Q

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

A

surplus

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10
Q

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

A

deficit

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11
Q

how can government get more money if theyre in a deficit

A

borrow to cover expenditure

take out of savings

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12
Q

deficits build up and become

A

debt

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13
Q

how can deficits be justified

A

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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14
Q

what is debt usually compared to

A

gdp

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15
Q

what is the EU target of national debt

A

60%

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16
Q

how has irish debt changed over time since 1994

A

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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17
Q

where does most government spending focus on

A

the young
old
unemployed

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18
Q

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

A

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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19
Q

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

A

higher taxes for higher earners

increase property tax

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20
Q

what is autonomous consumption

A

even without income, people will use their savings to consume

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21
Q

in the Keynesian cross what is the equilibrium line

A

where expenditure = national income

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22
Q

what type of relationship is there between expenditure and national income

A

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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23
Q

what is the deflationary gap

A

the difference between potential and actual output of the economy

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24
Q

why might there be a deflationary gap

A

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

25
Q

what is the basis of the Keynesian cross

A

that government can influence AD through fiscal and monetary policy

26
Q

what does MPC stand for

A

marginal propensity to consume

27
Q

what is MPC

A

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

28
Q

what does MPS stand for

A

marginal propensity to save

29
Q

what is MPS

A

for each new dollar of income, what is saved

30
Q

what will MPS + MPC be

A

1

31
Q

explain how the multiplier effect works with government spending

A

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

32
Q

what is the multiplier formula for government spending

A

1 / 1-MPC

33
Q

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

A

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

34
Q

explain how the multiplier effect works with government taxes

A

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

35
Q

what is the tax multiplier formula

A

-MPC / (1-MPC)

36
Q

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

A

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

37
Q

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

A

increasing government spending

38
Q

which effects AD less
decreasing taxes
increasing government spending

A

decreasing taxes

39
Q

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

A

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

40
Q

are multipliers unique to government spending

A

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

41
Q

what is crowding out

A

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

42
Q

why is crowding out caused

A

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

43
Q

does multiplier effect apply to private investments

A

yes

44
Q

Pros of government policy

A

smooths fluctuations

multiplier effect

45
Q

Cons of government policy

A

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

46
Q

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

A

in the foreign economy

47
Q

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

A

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

48
Q

best time for government to save money & pay off debts

A

in years of expansion

49
Q

which can be implemented more quickly:
fiscal policy
monetary policy

A

monetary policy

50
Q

why cant fiscal policy be implemented as quickly as fiscal policy

A

need to hire people
need approvals
so on

51
Q

why does an aging population cause an increase in government spending

A

more costs on pensions, medical care etc

shrinking labour force

52
Q

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

A

countries will stop lending

53
Q

how could an economy shift both AD and LRAS together

A

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

54
Q

how would
AD
and AS
change in Brexit without fiscal policy

A

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

55
Q

how would AD and AS change in Brexit with fiscal policy

A

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

56
Q

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

A

use the multiplier

57
Q

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

A

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

58
Q

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

A

initially negative demand shock

however the AD curve shifts back up due to government spending
Minimize effect on growth

Economics (25 decks)

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