Macroeconomic policy Flashcards
What occurs under a fiscal policy
Changes in government spending and taz to influence AD
What are the two types of fiscal policy?
Expansionary
contractionary
What occurs under an expansionary fiscal policy
AD increases
Unemployment falls
Inflation increases
What occurs under a contractionary fiscal policy
Inflation is reduced
Budget defecit is reduced
Current account deficit is reduced
What taxes are reduced under an expansionary fiscal policy?
Income tax
Corporation tax
How does an expansionary fiscal policy shift LRAS
LRAS shift rightwards
Problems with expansionary fiscal policies
Demand pull inflation and a current account deficit
worsening of government finances
Crowding out effect
X inefficiency
Time lags
How does the crowding out effect work
Increased government borrowing
higher demand for loans
Interest rates rise
More expensive for private firms to borrow
Less private investment
Why is the success of an expansionary fiscal policy dependent on the size of the size of the output gap
when an economy is close to YFE an expansionary fiscal policy becomes less effective
Why is the success of an expansionary fiscal policy dependent on the size of the multiplier?
Larger multiplier has a proportionally greater impact on policy due to there being an increased chance of further rounds of spending
Why is the success of an expansionary fiscal policy dependent on consumer and business confidence?
If confidence is low, changes in tax will have little effect
Why is the success of an expansionary fiscal policy dependent on the state of government finances?
Poor finances means policies may not be afforded
Why is the success of an expansionary fiscal policy dependent on the Laffer curve ideas
income tax falls= higher revenues due to incentives to work longer and harder because they can keep more of it
Why is the success of an expansionary fiscal policy dependent on the role of automatic stabilisers?
if automatic stabilizers are strong there is a reduced need for expansionary fiscal policies
What is an automatic stabilizer?
An automatic stabilizer is a part of fiscal policy that automatically changes with the level of economic activity to reduce fluctuations in the economic cycle
Give 3 examples of economic stabilizers
Income tax
Corporation tax
Welfare benefits
What does the OBR do?
Manage fiscal policies
What does the OBR stand for
Office of budgeting resources
What is a fiscal budget surplus?
When tax revenue is greater than government spending in one year
What is structural budget surphlus
A budget surphlus at full employment
What is a cyclical budget surphlus
A budget surphlus in a boom
Advantages of contractionary fiscal policy
Confidence in government finances-increases bonds as the government is seen as a less risky borrower-cheaper to borrow
Reduces X inneficiency- Less wasteful spending
Lower demand pull inflation reducing AD
Disadvantages of contractionary fiscal policy
- Demand side shocks- reducing growth increasing unemployment
- Risk of increasing income inequality
How might confidence in government finances prove advantageous for governments
The government is seen as a less risky borrower so it is cheaper and easier for them to get government bonds
