Topic 7 - Fiscal Policy Flashcards
1
Q
What is “The Budget”
A
- Annual statement of projected outlays and receipts
- Forecast of spending and taxes over next year
2
Q
What are the 3 Budget Outlays
A
- Includes all expenditures
- Debt interest payments
- Expenditure on goods and services
- Transfer payments like pensions
3
Q
What are the 3 Budget Receipts
A
- Primarily from taxes and assets
- Taxes on income, wealth and expenditure
- National Insurance
- Income from assets, royalties
4
Q
How is the Budget Balance calculated
A
- Budget Balance = Receipts - Outlays
- T - G, where T = net taxes
5
Q
What does it mean if we have positive/negative Budget Balance
A
- Positive = surplus
- Negative = deficit
6
Q
How does a government deficit work
A
- When in a deficit, the government is borrwing
- This is done by issuing government bonds
- e.g Debt issuance by government
7
Q
What is government debt and how do Budget Surpluses/Deficits affect it
A
- Total outstanding debt
- Deficits add to outstanding debt, Surpluses lower outstanding debt
- Debt (stock) increases approximately by the size of the deficit (flow)
8
Q
What is a crucial feature of government debt
A
- The debt does not have to be paid all at once
- Different maturities allows for different payback dates
- It has to be paid at some point, the government can either raise taxes or lower spending
9
Q
What does the Laffer curve show
A
- The relationship between the tax rate and the amount of tax revenue collected
10
Q
What are the features of the Laffer curve
A
- At the maximum point, T star, tax revenue is unlimited
- There is no gurantee high tax rates will increase tax revenue, there is an optimal solution
11
Q
What does fiscal policy consist of and what does the Two-Equation model show
A
- Government expenditure, G
- Taxation, T
- Short-term impact of one-off policy changes
12
Q
What is the equation for aggregate expenditure in the two equation model
A
- Y = C + I + G0
- G0 is given
- C and I are endogenous
13
Q
What are both consumption and investment given by in the two equation model
A
- C = a + b(Y - T0), where t0 is given, 0 < b < 1
- I = d - sigma * r, sigma > 0, and r is the interest rate
14
Q
What can we do with both C and I equations
A
- Substitute back into aggregate expenditure
- Y = A - delta * r + (G0 - b * T0 / 1 - b)
- Where A = a + b / 1 - b, delta = sigma / 1 - b
- This is called the IS curve
15
Q
What is the IR curve
A
- r = rCB
- Where rCB is given
