Lesson 26 - Fiscal Policy + Demand Management

Question 1

What are the types of fiscal policy?

Answer 1

Discretionary
Automatic

Question 2

What is discretionary fiscal policy?

Answer 2

Policies decided/implemented by one off policy changes implemented by govt

Question 3

What is automatic fiscal policy?

Answer 3

Tax + spending stabilisers
Slows down falling AD during recession
Restricts rising AD during growth

Question 4

What are the types of fiscal stance?

Answer 4

Neutral
Reflationary
Deflationary

Question 5

What is neutral fiscal stance?

Answer 5

Govt has balanced budget

Question 6

What is reflationary fiscal stance?

Answer 6

Govt running budget deficit

Question 7

What is deflationary fiscal stance?

Answer 7

Govt running budget surplus

Question 8

What is the fiscal multiplier?

Answer 8

Increase in AD due to ripple effect
Govt spending leads to further public + private spending

Question 9

Which 3 factors does an ideal govt stimulus package comprise?

Answer 9

Timely
Targeted
Temporary

Question 10

Why is it difficult to increase govt spending quickly?

Answer 10

Timing - large time lags
Plans, permits etc
Most spending isn’t discretionary, can’t be changed easily

Question 11

Why is it difficult to target govt spending on unemployment?

Answer 11

Unemployed may not have necessary skills
Spending does not have direct impact on unemployed

Question 12

How does spending have an indirect impact on the unemployed?

Answer 12

Public sector workers hired
Consumption rises
Other firms expand + hire unemployed

Question 13

What is the problem with the size of additional govt spending?

Answer 13

Only small % of gdp
Has minimal overall impact on AD

Question 14

Which factors dictate the effectiveness of fiscal policy?

Answer 14

How many jobs add. spending creates
Will tax cuts increase cons spending
Will spending cause inflation
Who benefits from tax cuts

Question 15

What are the 3 main forms of govt spending?

Answer 15

Transfer payments
Public sector jobs
Capital spending

Question 16

How do transfer payments affect AD?

Answer 16

Low income citizens have higher MPC
Welfare spending causes cons + AD to rise

Question 17

How does public sector work affect AD?

Answer 17

Large proportion of workers in public sector
Higher spending indices higher wage
AD + cons rise

Question 18

How does capital spending affect AD?

Answer 18

State investment creates jobs
Leads to consumption multiplier

Question 19

How is govt spending financed?

Answer 19

Tax (Usually)
However higher tax as a funding method may counter balance spending

Question 20

What is crowding out?

Answer 20

Transfer of industry + spending from private to public sector
Govt spending rises, has effect of reducing private spending

Question 21

When does crowding out generally occur?

Answer 21

When govt spending rises during period of high/full capacity

Question 22

What do free market economists argue about govt spending + fiscal policy?

Answer 22

Has significant potential to be more inefficient than private spending

Question 23

How does the state of the economy affect spending + fiscal policy?

Answer 23

Close to full capacity, spending may cause inflationary pressure + little increase in real gdp