Fiscal Policy: Basics Flashcards
What is the rationale of fiscal policy?
To shift aggregate demand in order to stabilise the business cycle, by:
- Increasing leakages and decreasing injections in an upturn or boom
- Decreasing leakages and increasing injections in a downturn or recession
The Australian Government’s budget balance changes from $10b in Year 1 to $20b in Year 2. What is the budget outcome in Year 2?
Surplus
The Australian Government’s budget balance changes from $10b in Year 1 to $20b in Year 2. What is the fiscal stance in Year 2?
Contractionary
The Australian Government’s budget balance changes from $10b in Year 1 to -$20b in Year 2. What is the budget outcome in Year 2?
Deficit
The Australian Government’s budget balance changes from $10b in Year 1 to -$20b in Year 2. What is the fiscal stance in Year 2?
Expansionary
The Australian Government’s budget balance changes from $20b in Year 1 to $10b in Year 2. What is the fiscal stance in Year 2?
Expansionary
The Australian Government’s budget balance changes from -$20b in Year 1 to -$10b in Year 2. What is the fiscal stance in Year 2?
Contractionary
The Australian Government’s budget balance is $10b in Year 1 and $0b in Year 2. What is the budget outcome in Year 2?
Balanced
The Australian Government’s budget balance is $10b in Year 1 and $10b in Year 2. What is the fiscal stance in Year 2?
Neutral
True or false: the Australian Government had a contractionary fiscal stance from 2015-2019 and by 2019 did not have a budget deficit
True
True or false: the Australian Government had a contractionary fiscal stance from 2015-2019 and by 2019 had paid off its debt
False
What are cyclical components of the budget?
Types of taxation or government spending that change with the business cycle (e.g. income tax, Jobseeker)
What are structural components of the budget?
Types of taxation or government spending that do not change with the business cycle (e.g. hospital funding)
What are discretionary changes to the budget, and what are examples of discretionary changes to tax and to government spending?
Changes to taxation or government spending due to a deliberate government decision (e.g. the government increase income tax rates or the amount of money paid to someone on Jobseeker)
What are non-discretionary changes to the budget, and what are examples of non-discretionary changes to tax and to government spending?
Changes to taxation or government spending due to changes in the business cycle (e.g. in a boom incomes and income tax rise and the number of people receiving Jobseeker falls)
What are the disadvantages of a budget deficit?
1) Crowding out effect
2) Worsens external stability
3) Inflationary pressures
4) Must be repaid by future generations
How long is the time lag of fiscal policy?
6-12 months for implementation (must pass through Parliament)
Immediate impact once it is spent
What are the ways to finance a budget deficit?
1) Borrow from the private sector
2) Borrow from overseas
3) Borrow from the RBA (print money)
4) Sell assets
How can the government use a budget surplus?
1) Pay off existing government debt
2) Invest in the Future Fund
3) Deposit with the RBA
How can fiscal policy be used to address high inflation?
A contractionary fiscal stance can decrease AD and demand inflation
How can fiscal policy be used to address an unequal distribution of income and wealth?
A progressive tax system and spending on welfare and government services (e.g. education) can reduce the income gap
Likewise, the government could charge a tax on assets (wealth) - but the Australian Government doesn’t do this
How can fiscal policy be used to address high unemployment?
An expansionary fiscal policy can increase AD and the derived demand for labour
The government can also spend on programs that reduce structural and frictional unemployment
How can fiscal policy be used to address environmental issues?
The government can tax negative externalities and subsidise positive externalities as incentives for actions that protect the environment
How can fiscal policy be used to improve external stability?
A contractionary fiscal policy can reduce government foreign debt, which lowers NFD and improves the NPY (due to lower interest repayments)
A contractionary fiscal policy also slows growth, which reduces consumption and import spending, improving the BOGS
