W9P1 - Notebooklm Flashcards
What are the two main roles of fiscal policy discussed in the lecture?
Microeconomic and macroeconomic roles.
Provide examples of the microeconomic role of fiscal policy
Provision of public goods (like law and order, defence), addressing externalities (like education, public health), intervention in markets with increasing returns to scale or high entry costs (like infrastructure projects), and addressing redistribution and equity.
Why might the free market fail to provide public goods effectively?
Because public goods are typically non-excludable, meaning you cannot prevent people from benefiting even if they don’t pay.
How can fiscal policy address positive externalities, such as in education or public health?
The government can provide subsidies to encourage consumption or production, as the public benefit exceeds the private benefit. For example, an educated workforce benefits society through higher taxes.
What types of projects with increasing returns to scale or high entry costs might warrant government intervention?
Infrastructure projects such as street roads, ports, and airports.
What is a potential trade-off when the government uses fiscal policy to increase equity through progressive taxation and income redistribution?
There is often a discussion about a trade-off between equity and efficiency. Increased taxes might lead to a decline in overall efficiency in the market.
How have government transfers changed as a fraction of GDP in many countries since the 1960s?
Government transfers have increased quite significantly as a fraction of GDP.
What does the Gini index measure? What do the values 0 and 1 represent?
The Gini index is a measure of income inequality. A value of 0 indicates no inequality, and a value of 1 indicates complete inequality (one person earns all the income).
How do countries like Sweden use their tax systems to impact income inequality?
These Scandinavian countries use their tax systems quite aggressively to make the income distribution more equal after taxes.
What is the main macroeconomic objective of fiscal policy?
Macroeconomic stabilization, which aims to smooth the business cycle and reduce volatility in output and consumption.
Why do agents prefer consumption smoothing, and how does this relate to the macroeconomic role of fiscal policy?
Agents have a preference for consumption smoothing and dislike large fluctuations in consumption between periods. The government can intervene to provide public goods by borrowing during bad times against future income, helping to stabilize consumption when individuals face borrowing constraints.
What are automatic stabilizers in the context of fiscal policy?
They are features of the tax system and government spending that automatically adjust with the level of income in the economy. For example, tax revenue increases during economic booms, and benefit payments increase during recessions.
What is a consequence of governments running persistent budget deficits over long periods?
The accumulation of public debt.
What has happened to the debt-to-GDP ratio in the UK in the last 30-40 years?
It has seen a quite significantly increase.
