Lesson 26 - Fiscal Policy + Demand Management Flashcards
What are the types of fiscal policy?
Discretionary
Automatic
What is discretionary fiscal policy?
Policies decided/implemented by one off policy changes implemented by govt
What is automatic fiscal policy?
Tax + spending stabilisers
Slows down falling AD during recession
Restricts rising AD during growth
What are the types of fiscal stance?
Neutral
Reflationary
Deflationary
What is neutral fiscal stance?
Govt has balanced budget
What is reflationary fiscal stance?
Govt running budget deficit
What is deflationary fiscal stance?
Govt running budget surplus
What is the fiscal multiplier?
Increase in AD due to ripple effect
Govt spending leads to further public + private spending
Which 3 factors does an ideal govt stimulus package comprise?
Timely
Targeted
Temporary
Why is it difficult to increase govt spending quickly?
Timing - large time lags
Plans, permits etc
Most spending isn’t discretionary, can’t be changed easily
Why is it difficult to target govt spending on unemployment?
Unemployed may not have necessary skills
Spending does not have direct impact on unemployed
How does spending have an indirect impact on the unemployed?
Public sector workers hired
Consumption rises
Other firms expand + hire unemployed
What is the problem with the size of additional govt spending?
Only small % of gdp
Has minimal overall impact on AD
Which factors dictate the effectiveness of fiscal policy?
How many jobs add. spending creates
Will tax cuts increase cons spending
Will spending cause inflation
Who benefits from tax cuts
What are the 3 main forms of govt spending?
Transfer payments
Public sector jobs
Capital spending
How do transfer payments affect AD?
Low income citizens have higher MPC
Welfare spending causes cons + AD to rise
How does public sector work affect AD?
Large proportion of workers in public sector
Higher spending indices higher wage
AD + cons rise
How does capital spending affect AD?
State investment creates jobs
Leads to consumption multiplier
How is govt spending financed?
Tax (Usually)
However higher tax as a funding method may counter balance spending
What is crowding out?
Transfer of industry + spending from private to public sector
Govt spending rises, has effect of reducing private spending
When does crowding out generally occur?
When govt spending rises during period of high/full capacity
What do free market economists argue about govt spending + fiscal policy?
Has significant potential to be more inefficient than private spending
How does the state of the economy affect spending + fiscal policy?
Close to full capacity, spending may cause inflationary pressure + little increase in real gdp
