Public Sector Finance

Question 1

Automatic stabilisers

Answer 1

• In recession benefits as a form of gov spending will increase as more people are unemployed, reduces the negative impact on AD
• During a Boom taxation automatically increases as more people have jobs and higher paying jobs reducing disposable income and spending so that AD doesn’t increase and cause inflation

Question 2

Discretionary fiscal policy

Answer 2

deliberate manipulation of gov spending and taxation to influence economy

Question 3

Different between the fiscal deficit and national debt

Answer 3

Fiscal deficit is when the government spends more than it receives in that year, the national debt is the sum of all the government deficits built up over many years

Question 4

structural deficit

Answer 4

deficit that occurs when there is no cyclical deficit, it is long term and not related to current state of economy and will add to the national debt

Question 5

cyclical deficit

Answer 5

Part of the deficit that occurs due to fluctuations in gov spending and taxation from the trade cycle, short term will be balanced out by changes in the trade cycle

Question 6

What is the actual deficit

Answer 6

cyclical + structural

Question 7

Why is it hard to get rid of the structural defect

Answer 7

It is impossible to know what part of the deficit is structural and cyclical

Question 8

Factors influencing the size of fiscal deficits

Answer 8

• Trade cycle
• unforeseen economic shocks
• Increase in interest on debts
• privatisation helps correct a deficit
• Governments primary objective (growth would worsen the deficit)
• high oil revenues can cover deficits

Question 9

What percentage of all UK gov spending is debt interest

Answer 9

7%

Question 10

Factors influencing the size of the national debt

Answer 10

• Continuous fiscal deficits over 3% will lead to national debt increasing over time
• ageing populations contribute to the national debt since the government runs a structural deficit to fund their pensions and strain on healthcare

Question 11

How is deficit and debt significant in crowding out

Answer 11

High levels of borrowing raises interest rates which causes crowding out of the private sector
—–> Government can borrow from overseas

Question 12

How is deficit and debt significant servicing their debt

Answer 12

Large amounts spent on interest repayments which has he opportunity costs

Question 13

How is the deficit and debt significant in inflation

Answer 13

High fiscal deficits can cause inflation, as gov spending increases so does private sector which causes AD to rise

Question 14

How is the debt and deficit significant in governments credit rating

Answer 14

High debt reduces the governments credit rating making boring harder and more expensive in the future

Question 15

How is the debt and deficit significant in foreign currency reserves

Answer 15

If government has borrowed from abroad it may have difficulties obtaining foreign currency to repay the loan, foreign currency shortages also cause consumers to not be bale to import goods

Question 16

How is the debt and deficit significant in growth

Answer 16

Government borrowing can be positive for growth if invested in capital as this will increase LRAS which will help correct the debt in the long term