Government Budgets and Fiscal Policy

Question 1

What is government revenue comprised of?

Answer 1

Personal income taxes, corporate income taxes, indirect taxes (sales tax), investment income.

Question 2

What is budget balance?

Answer 2

Budget balance= government revenues- government expenditures

Question 2

What is government expenditure comprised of?

Answer 2

Spending on goods and services, transfer payments, interest payments on government debt.

Question 3

What happens when revenue is less than expenditure and what do each one mean?

Answer 3

Raise taxes or cut spending, borrow or money financing.
Borrowing means selling bonds (IOUs) to private investors.
Money financing means selling bonds to the Bank of Canada instead of to private investors. Each of these have a downside.

Question 4

Budget deficit equation

Answer 4

(G+i x D) - T
Government expenditure + interest rate x borrowing (government debt) - Net tax revenue

Question 4

What is the debt-to-GDP ratio?

Answer 4

The debt-to-GDP ratio measures the size of the debt in relation to the country’s gross domestic product.

Question 5

Crowding out effects of budget deficits

Answer 5

Government budget deficits put upward pressure on interest rates and diminish both private sector investment and net exports.

Question 6

What is expansionary fiscal policy?

Answer 6

If real GDP is below potential GDP (recessionary gap) the government will increase government spending, lower taxes or both.

Question 6

What is contractionary fiscal policy?

Answer 6

If real GDP is above potential GDP (inflationary gap), the government will decrease spending, increase taxes or both.

Question 7

What is crowding out?

Answer 7

When the government borrows to finance increased expenditure or tax cuts in excess of revenue.