policy Flashcards
fiscal policy
the use of government spending or taxation to try to achieve the governments policy objectives
expansionary fiscal policy
use of fiscal policy to increase aggregate demand
can boos LRAS as a side effect, boosting the productive potential of the economy
contractionary fiscal policy
use of fiscal policy to decrease aggregate demand
expansionary fiscal policy goals
-boost growth
-reduce unemployment
-increase inflation
-redistribute income
example of expansionary fiscal policy
-reduction in income tax
-reduction in corporation tax
-increase in government spending
contractionary fiscal policy goals
cools the economy down after high rates of demand pull inflation
-reduce inflation
-reduce budget deficit/ national debt
-redistribute income
-reduce current account deficit
examples of contractionary fiscal policy
-rise in income tax
-rise in corporation tax
-fall in government spending
cons of expansionary fiscal policy
-demand pull inflation
-currant account deficit
-worsening of gov finances
-crowding out effect (private sector replaced by public sector spending)
-x - inefficiency - gov spending could be wasteful - excess costs
-time lags - time for policy to take into effect
evaluation of fiscal policy
-ouput gap size
-size of multiplier
-consumer/. business confidence
-state of gov finances
-long run returns to gov
-laffer curve
-role of automatic stabilisers
-crowding in vs crowding out
-
automatic stabilisers
fiscal policy tools to influence GDP and counter fluctuations in the economic cycle
in a boom they will coushin demand so it doesnt overheat
in a recession theyll support output to prevent a deep recession
automatic stabilisers examples
-progressive income tax
-welfare benefit
automatic stabilisers in a boom
-incomes imcrease, workers are pushed into a higher tax bracjet increasing ART, slowing down consumption
-unemployment low - gov spending on benefits reduces reducing AD
automatic stabilisers in a RECESSION
-incomes decrease - workers move into lower tax brackets - lower ART - prevents large drop in consumption
-unemployment high - gov spending on benefits increases
budget deficit
where gov spending > tax revenue
structural budget deficit
budget deficit at full employment
cyclical budget deficit
budget deficit in a recession
national debt
total stock of gov debt over time
running a bedget deficit or increase in national debt implies increased gov spending or lower taxes
pros of budget deficit
-higher growth, lower unemployment
-benefits of increased G - education healthcare, infastructure
-redistribution of income
-incentives of tax cuts
-crowding in - increased private sector investment
cons of budget deficit
-deterioration of gov finances
-inflation conflict
-current account conflict
-crowding out effect
-x - inefficiency
evaluation of budget deficit
-state of gov finances
-SR vs LR impacts
-stage of economic cycle
-specific policy used
-consumer/ business confidence
-automatic stabilisers
monetary policy
changes to interest rates, the money supply and the exchange rate by the central bank in order to influence AD
expansionary monetary policy
use lower interest rates to increase AD
-increase inflation
-increase growth
-reduce unemployment
expansionary monetary policy transmission mechanism
-decrease credit card interest rate - ↑C
-decrease savings rates - ↑C
-decrease mortgage rates - ↑C
-decrease business loans (rates) - ↑I
-weaker exchnage rate - ↑(X-M) - hot money outflow
LRAS and expansionary monetary policy
increase in investment from decrease in rates of business loans shifts LRAS right vias an increase in quality and quantity of capital
