Government spending (fiscal policy) Flashcards
What is government spending influenced by?
The need to provide public and merit good and the desire to control spending in the total economy
What are budgets?
Where governments announce their changes in spending
What is a budget deficit?
when government receipt such as taxation is less than government government spending
What is a budget surplus?
When government spending is less than government receipt
What is a demand side policy?
When governments use fiscal policy to manipulate the level of aggregate demand
What is expansionary fiscal policy?
When fiscal policy is used to increase aggregate demand
What is fiscal policy?
Decisions about spending, taxes and borrowing of the government.
What is one way in which government spending can increase AD?
A rise in government spending with the price level constant will increase AD
How does government spending affect the output gap?
By increasing spending relative to taxation and adopting an expansionary fiscalpolicy it can bring the actual evel of GDP up closer to the trend level. By cutting its spending and adopting a tighter fiscal stance, it can bring the actual level of gdp down closer to the trend level
What are the governments four major macroeconomic policy goals?
Achieve full employment with little or no inflation in a high growth economy with a current account equilibrium
How does government spending have an affect on inflation? What factors affect the level of inflation?
With higher gov spending ad shifts and inflation increases. The size of change in spending or taxation, the shape of as curve.
How does gov spending affect unemployment?
A higher budget deficit will reduce unemployment (at least in the short run).
Why is expansionary fiscal policy unlikely to affect the long term growth rate of an economy?
Because economic growth is caused by supply side policies such as investment, education and technology
How does expansionary fiscal policy lead to a deficit in the current account?
Efp leads to an increase in AD. this means that domestically consumers and firms will have more income and so will increase their spending on imports
