Macro Six Flashcards
Fiscal Policy, Monetary Policy, Unemployment, The Phillips Curve
What does fiscal policy involve
Manipulation of government spending, taxation and the budget position
What are Microeconomic reasons for using a fiscal policy
Pigouvian taxes (imposed on goods that bring negative externalities) to correct market failure
Spending on merit and public goods
What are Macroeconomic reasons for using a fiscal policy
Correcting inequalities in the distribution of income and wealth
Keynesian counter-cyclical demand management
What is the difference between a cyclical and a structural budget deficit
Structural budget deficits persists during a boom
What are the 5 main objectives of the Office for Budget Responsibility
Economic and fiscal forecasting
Evaluating performance against the targets
Sustainability and balance sheet analysis
Evaluation of fiscal risks
Scrutinising tax and welfare policy casting
How does resource “crowding out” limit the effectiveness of discretionary fiscal policies
By increasing government spending, there may be a fall in spending from private sectors as the price rises due to higher AD.
It may become less profitable to increase their own scale, disincentivising investments
How does financial “crowding out” limit the effectiveness of discretionary fiscal policies
If government spending is deficit-financed
Government borrowing rising increases the demand for loanable funds and their price (interest rates) rises.
This would make it more expensive for firms and household to borrow money, reducing consumption and investment.
What does the Ricardian Equicalence assume that must follow an increase in government spending eventually and what does this cause consumers to do
A increase in government spending must lead to an increase in taxation at some point.
Consumers start to save so they are able to maintain SoL when taxes are higher
What is Fiscal Drag
When nomial incomes rise, more people find themselves paying higher rates of income tax. The government ends up taking a higher proportion of real incomes
What is the Liquidity Trap
The idea that conventional monetary policies loses all traction (so cutting interest rates doesn’t work)
What can explain a Liquidity Trap
As rates approach 0, it is difficult to cut them further
If interest rates go below long-run averages, people expect them to rise in the future
During a recession consumer/business confidence is too low for people to spend and/or take on debt
What is The Paradox of Thrift
As saving increases, national income falls which also results in households’ ability to save falling as well
How can the Real Interest Rates be worked out
From subtracting the Nominal I.R from the inflation rate
