Fisical Policy Issues

Question 1

Crowding out

Answer 1

Increase in public sector spending e.g hospital displaced spending in private sector

Either by increasing prices of F.O.P

Or increasing cost of borrowing

Question 2

What does crowding do to other firms ?

Answer 2

Less profitable to increase scale

Thus dicentivising investment

Aka resource crowding out

Question 4

If an increase in gov spending is defecit financed what can this give a raise to ?

Answer 4

Financial crowding out

Question 5

Effects of an increase in govement spending

Answer 5

Increases demand for loanable funds thus increasing price i.e Intrest rates

More expensive for firms and households to borrow money

Thus decreasing incentive to borrow reducing consumptions and investment

Consequence includes limiting stability of private firms to grow and compete

Question 6

What is crowding out used to evaluate ?

Answer 6

Government spending

Question 8

Ricardian equivalance

Answer 8

Govement borrowing and tax cuts don’t stimulate economy

Because people save more in anticipation of future taxes

Question 9

Fisical drag

Answer 9

Progressive tax system limits on how much incomes increase during boom

Refers to automatic increase in tax revenues due to income increasing due to inflation or economic growth

But thresholds and allowances are not adjusted in line with this increase as a resault people may be put into a higher tax bracket

Even though there real incomes have not increased significantly