public sector finances 4.5.3

Question 1

automatic stabilisers

Answer 1

mechanisms which reduce impact of changes in the economy on national income (gov spending+taxation)
can’t prevent fluctuations but reduce the size of the problem
discretionary fiscal policy- deliberate manipulation of gov expenditure + taxes to influence the economy

Question 2

during a recession what would act as stabliser

Answer 2

benefits, as more people are unemployed so the fall in AD is reduced

Question 3

during a boom what would act as a stabiliser

Answer 3

tax to reduce disposable income and AD

Question 4

national debt

Answer 4

sum of all gov debts built up measured in money terms or as a percentage of GDP

Question 5

fiscal deficit

Answer 5

gov spends more than it receives that year

Question 6

cyclical deficit

Answer 6

part of the deficit that occurs because gov spending and tax fluctuates around the trade cycle (recession tax rev is low and spending is high)

Question 7

structural deficit

Answer 7

peak of a boom- no cyclical deficit so must be structural at this point
fiscal deficit that occurs when cyclical deficit is 0

Question 8

actual deficit

Answer 8

structural deficit+cyclical deficit

Question 9

why would national debt grow with a structural deficit

Answer 9

the gov constantly borrows to finance spending

structural deficits need to be eliminated but it’s hard to know what part of the deficit is structural vs cyclical

Question 10

factors influencing size of fiscal deficit

Answer 10

trade cycles-deficit increases as spending increases
unforeseen events-natural disasters=more spending
interest rates-on gov debt increases deficit
privatisation-one off payments decrease deficit short term depending on value of company sold
government aims-austerity aim eg decreases deficit but aim to increase AD increases spending+deficit
revenue from oil-gov revenue is higher
number of dependents-affects spending & tax revenue from income tax etc

Question 11

factors influencing size of national debt

Answer 11

running on a constant deficit

ageing populations contribute as gov runs a structural deficit to fund pensions and care

Question 12

significance of fiscal deficits + national debts

Answer 12

could cause crowding out 
high opportunity cost
can cause intergenerational inequality 
inflation
reduced credit rating
low foreign currency
can benefit growth

Question 13

crowding out (fiscal deficits)

Answer 13

high levels of borrowing raise interest rates as there’s an increase in demand & price of money
gov could borrow from overseas instead/during a recession private sector investment may fall so interest rates may remain unchanged

Question 14

intergenerational inequality from fiscal deficit

Answer 14

less money is passed onto the next generation, but this tax is avoidable
USA progressive tax but welfare system isn’t effective at redistributing income
finland less progressive but better at redistributing

Question 15

high opportunity cost

Answer 15

large amounts of money needed to service their national debt
primary budget deficit-actual deficit without interest payments
in a liquidity trap (low interest) gov can borrow at low rates for long periods of time

Question 16

inflation

Answer 16

AD rises if gov spending increases and private sector spending stays the same or increases
if they’re unable to borrow money they’ll print more causing hyperinflation (Zimbabwe 2008)
depends on how much is printed

Question 17

credit rating

Answer 17

higher debt reduces credit, private sector estimate how likely it is the gov will default on its debt rating from AAA to D
lower rating=riskier to lend to them so higher interest rates are demanded
size of debt doesn’t influence level of risk, it’s whether the gov has ever defaulted/ economic climate

Question 18

foreign currency

Answer 18

difficulties getting enough to repay dept, harder to import goods

Question 19

benefits to growth

Answer 19

if spent on capital it improves supply side of the economy, reduces deficit long term