lesson 11: fiscal policy in action Flashcards
what are reasons for the economic cycel?
fluctuations in AD
speculative bubbles
economic shocks
multiplier/accelerator effect
climactic cycles
what is a speculative bubble?
when prices get above their real value bubbles burst and people stop spending
what is the multiplier effect?
an initial injection of spending (like government investment or increased consumption) leads to a larger overall increase in national income
what is the accelerator effect?
investment leads to consumption leads to growth and the cycle repeats increasing real GDP
what is an automatic stabiliser?
when tax and spending changes naturally have as real GDP changes
what is discretionary stabilisers?
government chooses to make a change to tax and spending
when is discretionary stabilisers used?
when we have a recession and there’s unemployment —> benefits f
fiscal policy and employment
tax decreases may lead to more leakages (more disposable income spent on imports or saving)
in the long run firms are forced to take on more workers to increase output
what does tackling inflation through contractionary policies cause?
unemployment
fiscal policy and long run growth
economy below Yfe —> gov increase output by boosting AD
but if output is rising —> economic growth —> AS must also increase —> we have to increase productive capacity therefore —> supply side
fiscal policy and the BOP
if we have a deficit the gov may try to reduce it with fiscal policy (expenditure reducing eg contractionary policies or expenditure switching tariffs etc)
solution in the supply side to raise productivity
what is resource crowding out?
the free market economists argue that if the public sector use scarce resources they wont be available for the private sector so its output falls
what is the OBR?
office for budget responsibility an independent fiscal watchdog to provide analysis of the UKs public sector finance
