Topic 7 - Fiscal Policy Flashcards
What is “The Budget”
- Annual statement of projected outlays and receipts
- Forecast of spending and taxes over next year
What are the 3 Budget Outlays
- Includes all expenditures
- Debt interest payments
- Expenditure on goods and services
- Transfer payments like pensions
What are the 3 Budget Receipts
- Primarily from taxes and assets
- Taxes on income, wealth and expenditure
- National Insurance
- Income from assets, royalties
How is the Budget Balance calculated
- Budget Balance = Receipts - Outlays
- T - G, where T = net taxes
What does it mean if we have positive/negative Budget Balance
- Positive = surplus
- Negative = deficit
How does a government deficit work
- When in a deficit, the government is borrwing
- This is done by issuing government bonds
- e.g Debt issuance by government
What is government debt and how do Budget Surpluses/Deficits affect it
- Total outstanding debt
- Deficits add to outstanding debt, Surpluses lower outstanding debt
- Debt (stock) increases approximately by the size of the deficit (flow)
What is a crucial feature of government debt
- 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
What does the Laffer curve show
- The relationship between the tax rate and the amount of tax revenue collected
What are the features of the Laffer curve
- 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
What does fiscal policy consist of and what does the Two-Equation model show
- Government expenditure, G
- Taxation, T
- Short-term impact of one-off policy changes
What is the equation for aggregate expenditure in the two equation model
- Y = C + I + G0
- G0 is given
- C and I are endogenous
What are both consumption and investment given by in the two equation model
- C = a + b(Y - T0), where t0 is given, 0 < b < 1
- I = d - sigma * r, sigma > 0, and r is the interest rate
What can we do with both C and I equations
- 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
What is the IR curve
- r = rCB
- Where rCB is given
What do both the IS and IR curves look like
- IS, downward sloping relationship between Y and r
- IR, pegged at r = r(CB) by central bank
What are the two forms of fiscal policy
- Expansionary and Contractionary
- Expansionary causes outward shift of IS, Contractionary causes inward shift of IS
How do we work out the G multiplier and the T multiplier
- Partially Differentiate Y in terms of G and T
