Fiscal Policy and Public Debt Flashcards
long run d
observe economy over a long period of time (not all factors flexible)
short run d
3-6 months maybe even year, deviation from long run value
brief history of fiscal policy for these periods: before 1930 stock market crash/great depression before 2007 global financial crisis
before 1930 - laissez faire approach (policy of leaving things to take their own course),
stock market crash - policymakers push for governments to play more proactive role,
before 2007 - countries scaled back size and function of government,
global financial crisis - many countries returned to more active fiscal policy
fiscal policy d
governments use spending and taxing powers to promote stable and sustainable growth
expansionary fiscal policy d
policy that is expected to increase aggregate demand, tax reductions and/or increase in government expenditure
contractionary fiscal policy d
policy that is expected to reduce aggregate demand, tax increases and/or reductions in government expenditure
what is Keynes’ basic theory (not technically worded)
demand side is everything basically,
governments need to spend when recession
what was Hayek’s basic theory
private investment, rather than government spending would promote sustainable economic growth
what were the two bits of fiscal policy during the financial crisis
economic stimulus act of 2008 (bush),
american recovery and reinvestment act 2009 (obama)
when was the economic stimulus act and who implemented it
2008,
Bush
when was the american recovery and reinvestment act and who implemented it
2009,
Obama
tell me about the economic stimulus act of 2008
bush, more than $100 billion, tax rebates (more than 70 million), american households receive $950 tax rebate, business investment tax incentives
tell me about the american recovery and reinvestment act 2009
obama, $787 billion until 2019 for 10 years, tax credit up to $800 per family, business investment tax incentives, aid to unemployed, government spending on infrastructure and other investments
public good d
g + s that are non-excludable and non-rival
government consumption d
provision of public goods such as education and health care
government investment d
investment by the government in schools, hospitals and transport systems
government transfers d
payment by the government for which there is nothing received in return, pensions, child allowances, social assistance
what does G stand for
government consumption and investment
what does T stand for
taxes (minus transfers)
what does D stand for
net government debt
G=T
balance
G>T
budget deficit (primary deficit)
G
budget surplus
due to the financial crisis, what has the budget balance been a lot recently (in terms of g and t)
G>T
budget deficit as a percentage of gdp equation
(G-T)/Y *100
automatic stabilisers d
features of the structure of modern government budgets, particularly income tax and welfare spending, that act to dampen fluctuations in real GDP
example of automatic stabilisers (2 examples)
Y down, unemployment up, spend more on unemployment benefits G up,
Y down, tax revenue down because less working
what is a sort of timeline of what could happen if the government has a budget deficit
deficit, (decrease expenditure or increase taxes(doesn’t do this because unpopular with voters)) or (borrow domestic or foreign), accumulation of borrowing, debt
how does a government borrow money from domestic or foreign markets
by issuing bonds in return for a given rate of interest
what is the condition for the deficit to be unsustainable
r > g,
interest rate > growth rate
explain brief timeline of latin america debt crisis
booming gdp per capita 1962 - 1979,
fall from 1979 - 1984
explain the petrodollar recycling diagram
petrodollars (middle east) deposit money in us bank such as citibank, citibank make flexible loans to latin america, latin america buy more oil from middle east (consumption not investment so doesn’t bring rate of return)
what happened as a result of the 1973 yom kippur war
oil embargo by opec countries punishing the us for involvement, this increased the price of oil dramatically in the us (because had to get from elsewhere), led to inflation in the us
how did the petrodollars diagram lead to the latin american debt crisis
inflation in us high because of oil prices (because of embargo due to yom kippur),
increased us interest rate (paul volcker chairman of federal reserve),
latin america had lots of flexible loans from us banks so couldn’t pay back loans due to higher rates
what was another thing that caused the latin american debt crisis
the fact that the loans from the us banks were being used for consumption rather than investment so not giving any rate of return
who defaulted on their loans in 1982, how much was it and what crisis was this related to
mexico 1982 default on loans $80 billion,
latin american debt crisis
what greek letter is inflation
π
what was some outcomes of the latin american debt crisis
paul volcker could either reduce i or loan more money to la,
didn’t want to reduce i because would return the us to high inflation rate,
IMF and world bank loaned money,
only pay back the principal (interest) not the actual loan
sovereign debt (public debt or national debt) d
how much a coutry’s government owes to outside creditors
what are some factors that sovereign debt can arise from
lack of mechanism/institutions to prevent build up of macroeconomic and fiscal imbalances,
lack of common eurozone institutions to effectively absorb shocks
what happened to periphery nations in the eu at the start
joining the eurozone, big capital flows (such as bank loans) from ez core nations like germany to periphery nations like ireland and portugal,
cheap credit used to finance consumption rather than investment,
periphery became dependent on foreign lender to cover savings - investment gap
name some eurozone core and periphery locations
core - germany france,
periphery - portugal ireland
what are problems with the big capital flows (bank loans) from ez core nations to periphery locations
cheap credit used to finance consumption rather than investment,
periphery became dependent on foreign lenders to cover savings - investment gap
stability and growth pact d
rules that ensure the value of the euro is maintained by enforcing fiscal responsiblity,
annual budget deficit no greater than 3% of GDP and national debt that is no greater than 60% of GDP
explain how the eurozone countries were affected by the financial crisis
financial crisis - core ez members no longer lend periphery,
dec 2008 eu leaders agree on 200bn euro stimulus plan (to boost european growth following global financial crisis),
raised concerns about viability of banks and governent,
2010 concern builds over heavily indebted countries (portugal ireland greece),
euro continues to fall against dollar and pound,
feb 2011 imf steps in with bailout woth 500bn to save indebted countries
explain greek situation during financial crisis
core ez stop lending to periphery because of financial crisis,
2009 greek government announces budget deficit 12.7% of GDP (violation of sgp),
ratings agencies downgrade greek bank and government debt,
eu promise to act over greek debt - command greek government to make spending cuts
how has government debt changed over time
for oecd countries it grew largely during the 1970s, growth slowing down in 1980s and since financial crisis has been on the rise
debt accumulation equation when no inflation and constant interest rate
∆B = G-T + rB,
debt accumulation = primary deficit + debt service
what does the symbol i mean
nominal interest rate
what does the symbol r mean
real interest rate
what does the symbol pi mean
inflation
what is the fischer equation basic
r ≈ i-π
what is the equation that is equal to 1+i
(1+r)(1+π)
how does (1+r)(1+π) mean that r≈ i - π
because if you expand it out then you get i = r + π +rπ,
rπ is approximately equal to zero because they are both small numbers like (0.05 x 0.025)
what is the equation for the accumulation of government debt in the period (star)
∆Dt+1 = Gt - Tt +rDt,
government debt in period = government expenditure - amount raised by taxation + interest rate x government debt in period
how do you change this equation to get rid of the ∆ (∆Dt+1 = Gt - Tt +rDt) (star)
Dt+1 - Dt = Gt - Tt +rDt,
then rearrange to get,
Dt+1 = Gt - Tt + (1+r)Dt
formula for the debt ratio in the period
dt = Dt / Yt,
debt ratio in period = government debt in period / GDP in period
if X=YZ and gx gy and gz are the respective growth rates what is the relationship
gx ≈ gz + gy
if X=Y/Z what is the relationship between gx gy and gz
gx ≈ gy - gz
if X=Y^αZ^β what is the relationship between gx gy and gz
gx ≈ αgy + βgz
if dt = Dt / Yt then knowing those rules about changing growth rates what is the equation of the growth rates of all these variables in relation to each other
(∆dt+1/dt) = (∆Dt+1/Dt) - (∆Yt+1/Yt),
growth rate of debt ratio = growth rate of debt - growth rate of output (assumed to be constant (constant growth rate assumed))
what happens to this equation when you sub in the fact that the growth rate is constant (∆dt+1/dt) = (∆Dt+1/Dt) - (∆Yt+1/Yt)
(∆dt+1/dt) = (∆Dt+1/Dt) - g
what happens to this equation when you multiply both sides by Dt/Yt (remember that dt=Dt/Yt) ((∆dt+1/dt) = (∆Dt+1/Dt) - g)
∆dt+1 = (∆Dt+1/Yt) - gDt/Yt
sub ∆Dt+1 = Gt - Tt + rDt into (∆dt+1 = (∆Dt+1/Yt) - gDt/Yt)
∆dt+1 = (Gt - Tt + rDt)/Yt - gDt/Yt
rearrange (∆dt+1 = (Gt - Tt + rDt)/Yt - gDt/Yt)
∆dt+1 = (Gt - Tt)/Yt + (r-g)Dt/Yt
what could you do to this equation (∆dt+1 = (Gt - Tt)/Yt + (r-g)Dt/Yt)
drop the time subscripts and use ∆D/Y to denote the change in the debt ratio,
∆D/Y = (G-T)/Y + (r-g)D/Y
