Unit 7 Flashcards
what are the main macroeconomic objectives
- Price stability = Low inflation
- Economic growth – positive and sustainable growth
- Maximum employment
- Current account sustainability
- Government debt sustainability
- Exchange rate stability
What is fiscal policy
Governments influence the economy by changing
* The level and types of taxes
* The level and types of government expenditures
* The degree and form of borrowing
What is monetary policy
Central banks usemonetary policy to achieve price stability and stabilize output and employment
* Open Market Operations
* Reserve Requirements
* Foreign Exchange
* Discount Rate
Are transfer payments included in GDP
No
What is automatic fiscal policy
Government spending and
taxation rules already existing
that cause fiscal policy to be
automatically
e.g. income taxation, unemployment benefits
What is discretionary fiscal policy
More active fiscal policies involve modifications on government spending and tax rules that are implemented to stabilise the economy around business cycles.
e.g. the stimulus payments during covid
What fiscal policy can close a recessionary gap
expansionary fiscal policy
What fiscal policy can close an inflationary gap
contractionary fiscal policy
When does government spending crowd out private spending
It crowds out private spending when all the resources in the economy are used (e.g. when the economy is in full employment)
Why does government spending crowd out private spending
There is more competition for resources leading to increased prices
Gov can absorb funds meaning that there is less money for business to invest
if the gov is borrowing high amount of money there can be expectation that taxes will increase leading to reduced investment and spending
How are the fiscal policy and the multiplier connected
The fiscal policy generates a multiplier effect that increases incomes and output levels .
gov spending = consumption and investment = GDP
What is a budget surplus
A positive budget balance
What is a budget deficit
A negative budget balance
What is a cyclically adjusted budget balance
an estimated budget balance if the economy was at potential output
What causes a cyclically adjusted deficit
This is caused by a slowing economy rather than a fiscal policies
