topic 10- fiscal policy 1

Question 1

what was the effect of the financial crisis on the consensus assignment in economic policy?

Answer 1

it shattered the ideas that:
* Monetary policy stabilized inflation and output.
* Fiscal policy was not used at all as a counter-cyclical tool but was uniquely destined to stabilize the ratio of government debt to GDP

Question 2

what does the government budget consist off?

Answer 2

it consists of an expenditure and revenue. the expedniture consists of government purchases G and interest repayments on existing debt. on the revenue side, there are taxes and credit granted by the public (debt financing) or the central bank (money financing). if desired, G may be thought to include transfers. then T must include tems like social security contributions and unemployment insurance premiums

Question 3

what is the equation for the government budget deficit?

Answer 3

G+iB - T where G is government purchases, iB is interest repayments and T is taxes

Question 4

what is the overall budget ocnstraint for the government?

Answer 4

G+ iB -T = Δ𝐵 + Δ𝑀 and this identidy is always true ex post.

Question 5

what are the three possible ways of covering its defiict?

Answer 5

1) raising taxes;
2) issuing more debt;
3) monetizing the debt by printing money