theme 9

Question 1

Measures of government budget

Answer 1

1. Expenditure for the production of goods and services: excluding transfers
   G/GDP
2. Total expenditures in all categories: including transfers
   Government budget/GDP
3. Tax burden rate: Tax revenues of all levels of government as % of GDP
   T/GDP
4. Total expenditures in all categories + estimated value of regulatory interventions, controls, etc. And their costs in terms of losses. (Estimated 60%)

Question 2

Budget balance

Answer 2

= Revenues-Expenses

Question 3

Primary balance:

Answer 3

Revenues – Expenses + Debt services

Question 4

Gross debt:

Answer 4

government’s debt excluding government assets

Question 5

Net debt:

Answer 5

Gross debt – Government assets

Question 6

Cyclical deficit

Answer 6

negative budget balance due to poor economic conditions. Fluctuations in the public finances (deficit, balance or surplus) less important than LR.
Ex: pandemic, natural disaster, new government, wars, recessions

Question 7

Structural deficit

Answer 7

Part of the deficit caused by a permanent, LR structural disconnect between revenues and expenditures, even without counting debt service. Indicates that the government has too much spending relative to its revenues. Gov debt is likely to increase at a rate greater than GDP over the LR, which increases the government debt/GDP ratio over the LR and may cause problems for government’s fiscal credibility and even degenerate into a finance crisis.
Ex: work force, operations, new gov programs, nationalisation

Question 8

Office of the Parliamentary Budget Officer

Answer 8

Evaluation of LR fiscal position

Question 9

The debt can increase while the debt-to-GDP ratio decreases

Answer 9

the debt only needs to increase less rapidly than GDP, which means that the deficit as a % of GDP is less than economic growth.

When the government runs a surplus or deficit as a % of GDP that is less than GDP growth, the debt/GDP ratio falls. It is important to keep public finances on sustainable long-run dynamics so that interest payments on government debt do not take up more and more of GDP, as well as to avoid a public finance crisis.

Question 10

Debt service as a % of GDP can evolve differently from the debt-to-GDP ratio

Answer 10

since interest rates can trend down or up

take on more debt when interest rates are lower.
risk is obviously an interest rate shock: a rapid, large, and permanent rise in interest rates when debt is high can put considerable pressure on public finances, as is the case for household finances

Question 11

Multiplier effect on AD

Answer 11

1/(1-mpc)
An increase of 100 with mpc =… will cause an increase in the aggregate demand of …

The increase in AD is not entirely reflected in the increase in Y since SRAS is positively sloped ad not horizontal.

Question 12

Crowding out effect:

Answer 12

Increase in Y = Increase in demand for money = increase in the interest rate and appreciation of currency; decrease in C; decrease in I; decrease in NX

Question 13

Fiscal multiplier (tax multiplier):

Answer 13

1/(1-c1-b1+m1)
C1: Marginal propensity to consume
B1: Marginal propensity to invest
M1: Marginal propensity to import

If Fiscal multiplier < 1: an increase in G of 1 causes an increase in Y of less than1
If Fiscal multiplier > 1: an increase in G of 1 cause an increase in Y of more than 1

Question 14

Fiscal policy

Answer 14

affects both the interest rate and the exchange rate, causing a crowding-out effect. But in a fixed exchange rate regime, the central bank intervenes to prevent the change in the interest rate and the exchange rate

Question 15

Fiscal policy and fixed exchange rate regime

Answer 15

under a fixed exchange rate regime, an expansionary fiscal policy “forces” the central bank to undertake an expansionary monetary policy to prevent interest rate and exchange rate changes