Unit 4 fiscal policy

Question 1

Fiscal Policy objective: 3 Rules of Government

Answer 1

Allocation: build infrastructure, invest in research, provide public
services such as education
* Redistribution: levy progressive taxes, provide means-related transfers
* Stabilization: smooth out the economic fluctuations of the cycle

Question 2

Fiscal Policy Definition

Answer 2

FISCAL POLICY: decisions concerning government spending and taxation to influence aggregate demand and steer the economy toward equilibrium. ∈ stabilization.

Question 3

Discretionary fiscal policy definition

Answer 3

Discretionary fiscal policy: explicit decision to adjust spending or
taxes in a point in time.

Question 4

Automatic fiscal policy definition

Answer 4

Automatic fiscal policy or “automatic stabilizers”: when the tax or spending rules are already set but they evolve automatically with growth of inflation in a way that counters the cycle (countercyclical).
* Recession: the volume spend in goverment spending ↑ without any action (for unemployment, poverty, companies in trouble), while the amount collected as taxes ↓ (less consumption, salaries, profits…). While the economy’s aggregate demand is falling, the automatic stabilizers push it up.
* Expansion: the opposite.

Question 5

Assets of the Government

Answer 5

Government accounts are generally much less comprehensive and sophisticated than the accounts of private companies, because for example, it’s assets are hard to value (things like infrastructure, cultural/historical/natural resources or social programs have no market price)

Question 6

Liabilities of the Government

Answer 6

• Liabilities: easy to record when it’s bond and loans. In the EU, liabilities must also include the contingent in-balance liabilities like guarantees provided to state-owned companies (this means payments that might not have to be paid out for sure, but there is a possibility that will have to be paid).
• There are a certain kind of liabilities that do not appear in balance: offbalance liabilities. Example: pensions to civil servants and other agents
  entitled to receiving transfers (certain off-balance)