UNIT 7: FISCAL POLICY Flashcards
What are two main tools of a fiscal policy?
Fiscal policy has 2 main tools: G’s spending & Taxation.
What is deficit spending?
- Deficit is the difference between G’s expenses and revenues from taxation.
- Deficit spending means spending the money borrowed or printed instead of money from taxation.
What is an expansionary fiscal policy?
A fiscal policy is expansionary when the G increases G’s spending or reduces taxes rates or combines both.
What is an contractionary fiscal policy?
A fiscal policy is contractionary when the G reduces G’s spending or increases taxes rates or combines both.
What are the objectives of an expansionary fiscal policy?
The objectives of an expansionary fiscal policy are to reduces unemployment rate and to promote economic growth.
What are the objectives of an contractionary fiscal policy?
The objective of an contractionary fiscal policy is to reduce inflation.
Why should the G consider the fiscal policies of other countries?
Because fiscal policies of other countries with tax incentives may tempt multinational corporations to relocate their subsidiaries.
What is deficit spending? Is deficit spending harmful or helpful? Why?
Deficit spending means spending the money borrowed or printed instead of money from taxation. Deficit spending can be either helpful or harmful for the economy.
Deficit spending is helpful when economic growth rate is still low and unemployment rate is high. For example, when the G borrows money to build a highway, the construction will create more jobs for local people, this reduces unemployment rate. The construction also creates more incomes for both workers and firms. With more incomes, they tend to spend more then aggregate demand will increase, leading to more production of goods and services. Thus the economy tends to grow.
Deficit spending is harmful when inflation rate is high. In the above example, the construction will create more incomes for both workers and firms. With more incomes, they tend to spend more then aggregate demand will increase, leading to a rise in prices and then it is difficult to control inflation. In consequence economic crisis may happen.
When should the fiscal policy be expansionary? Why?
The G should run an expansionary fiscal policy when economic growth rate is still low and unemployment rate is high. For example, when the G borrows money to build a road, the construction will create more jobs for local people, this reduces unemployment rate. The construction also creates more incomes for both workers and firms. With more incomes, they tend to spend more then aggregate demand will increase, leading to more production of goods and services. Thus the economy tends to grow.
When should the fiscal policy be contractionary? Why?
The G should run a contractionary fiscal policy when inflation rate is high. For example, income tax rates increase leading to incomes of firms and workers reduce, then aggregate demand decrease. Thus pressure of prices is much more lower, as a result, inflation rate will reduce.
What factors should the G consider when making decisions on its fiscal policy?
Internal factors: economic growth unemployment inflation natural disasters wars political consideration and so on. External factors: Fiscal policies of other countries Requirements of international financial institutions (WB, IMF)
SUMMARY
There are some main ideas in U7: tools of a fiscal policy, deficit spending, expansionary or contractionary fiscal policy and factors influencing decisions of a fiscal policy.
Firstly, two main tools of a fiscal policy are G’s spending and taxation.
Secondly, deficit spending means spending the money borrowed or printed instead of money from taxation. It can be helpful when the economic growth rate is low and unemployment rate is high or be harmful when inflation rate is high.
Thirdly, a fiscal policy should be expansionary when economic growth rate is low and unemployment rate is high, and should be contractionary when inflation rate is high.
Finally, the G should consider some factors in making decisions on its fiscal policy such as internal factors (natural disasters, wars, political consideration, etc) and external factors (fiscal policies of other countries, requirements of international financial institutions such as WB, IMF).
