Week 14: Fiscal Policy

Question 1

What is Fiscal Policy?

Answer 1

The government’s use of spending and tax policies to attempt to stabilize the economy.

Question 2

Define Expansionary Fiscal Policy

Answer 2

Way of increasing a Negative OG by increasing spending/lowering taxes

Question 3

How does Government spending directly and indirectly add to GDP?

Answer 3

Directly: Government purchases and spending
Indirectly: Transfer Payments and Tax Reduction

Question 4

Define Contractionary Fiscal Policy

Answer 4

Way of Decreasing a Positive OG by decreasing spending/ raising taxes

Question 5

What is Discretionary Fiscal Policy?

Answer 5

from deliberate actions by policy makers rather than from the business cycle.

Question 6

What are automatic stabilizers?

Answer 6

How taxes and government support programs automatically respond to contractions and exxpansions in the businness cycle

Question 7

How does a progressive tax system work?

Answer 7

A progressive tax system helps counter both contractions and expansions.
Negative OG: drop into a lower tax bracket which allows consumer to keep more income.
Positive OG: rise into a higher tax bracket which means consumers keep less income.

Question 8

How do government support programs work as automatic stabilizers?

Answer 8

Negative OG: More people qualify for government benefits.

Positive OG: Fewer people qualify for government support programs.

Question 9

Define Government Deficit

Answer 9

The difference between government revenues and expenses over a given period.

Question 10

Define Government Debt

Answer 10

The sum of money a government owes at a particular point in time.

Question 11

Role of Expansionary fiscal policies

Answer 11

decrease the budget balance for that year
- make a budget surplus smaller or a budget deficit bigger.

Question 12

Define cyclically adjusted budget balance

Answer 12

estimates of the budget balance if the economy were at potential output

Question 12

Role of Contractionary fiscal policies

Answer 12

• increase the budget balance for that year
• making a budget surplus bigger or a budget deficit smaller.

Question 13

Crowding Out

Answer 13

When increaased government spending leads to a decrease in the supply of loanable funds, which leads to a decline in investment

Question 14

What is an increase in Public Debt caused by?

Answer 14

Persistent budget deficits

Question 15

What is the austerity dilemma?

Answer 15

Governments cut spending and/or increase taxes to show that they are rsponsible with money but it actually makes the economu worse off

Question 16

What are 5 reasons why we shouldn’t worry about government debt?

Answer 16

1. Most of our government debt is money owed by Canadians to Canadians.
2. Future generations can help repay the debt.
3. It wouldn’t take a big adjustment to repay the debt.
4. The government never really needs to repay the debt.
5. The government has options that you don’t have:
   a. Raise taxes
   b. Print money (but beware of inflation, or worse, hyperinflation)

Question 17

What are 4 reasons why we should worry about government debt?

Answer 17

1. Slower economic growth: The government borrows funds that might otherwise be used to finance investments in productive capital.
2. Harder to use fiscal policy in the future: Future fiscal choices are constrained because is harder to borrow.
3. The risk of a crisis of confidence: A perceived risk of default could lead lenders to charge a higher interest rate, making it difficult/impossible to make loan repayments.
4. A debt crisis becomes more likely: Higher government debt can lead to a debt crisis in which the government simply can’t repay its loans.