Week 3

Question 1

fiscal policy definition

Answer 1

changes to taxes, expenditures and borrowing that are intended to control the level of economic activity

Question 2

2 ways fiscal policy impacts/influences in macroeconomics

Answer 2

• manage output gaps
• increase productive capacity

Question 3

3 ways Fiscal Policy impacts/influences in microeconomics

Answer 3

• provide public and merit goods
• discourage de-merit goods
• manage income distribution (re-distribution, income inequality)

Question 4

expansionary fiscal policy definition

Answer 4

changes to taxes, expenditure and borrowing that aim to increase the level of economic activity
- net injection increases economic growth in the short term, gov debt increases

Question 5

contractionary fiscal policy definition

Answer 5

changes to taxes, expenditure and borrowing that aim to reduce the level of economic activity
- net leakage reduces economic growth in the short term, gov debt falls

Question 6

when is contractionary fiscal policy used

Answer 6

when the positive output gap is getting too large, to reduce economic growth/activity

Question 7

when is expansionary fiscal policy used?

Answer 7

when the negative output gap is getting too large, to increase economic growth/activity

Question 8

short-term V long-term expansionary fiscal policy

Answer 8

• in short-term AD shifts outwards, increase in PL, and increase in real output (Y)
• in Long-term AD shifts outwards, a bigger increase in PL, and no change in real output (Y)

Question 9

classical views on expansionary fiscal policy

Answer 9

• classical: any outward shift of AD is going to be inflationary because SRAS straight sloping upwards
• Keynesian: points on the AS are perfectly elastic due to the level of spare capacity in the economy (Y to Y1 to YFE) meaning an increase in AD can cause no inflationary changes

Question 10

Keynesian views on expansionary fiscal policy if there’s spare capacity

Answer 10

points on the AS are perfectly elastic due to the level of spare capacity in the economy (Y to Y1 to YFE) meaning an increase in AD can cause no inflationary changes and big real output changes

Question 11

keynesian views on expansionary fiscal policy if there is little spare capacity

Answer 11

points on the AS are inelastic/perfectly inelastic due to the level of spare capacity (Y to Y1 to YFE), meaning an increase in AD can cause massive inflationary changes, but little real output changes

Question 12

how do classical and Keynesians compare in the long-term for expansionary fiscal policy?

Answer 12

for both, if LRAS increases too it counteracts the inflationary effects, and real output increases (AD shifts outwards and LRAS shifts outwards)

Question 13

Keynesian view if there is spare capacity in the economy

Answer 13

in the short term the inflationary risk is low

Question 14

Keynesian view if there isn’t spare capacity in the economy

Answer 14

in the short term there is high inflationary risk

Question 15

why would their be high long term inflationary risk if expansionary fiscal policy is used

Answer 15

if the productive capacity (LRAS) doesn’t expand

Question 16

active fiscal policy definition

Answer 16

deliberate changes in fiscal policy (taxes and expenditure) which influence the path of economic growth

Question 17

automatic stabilisers definition

Answer 17

automatic fiscal effects which influence the path of economic growth due to cyclical changes in tax revenue and welfare costs

Question 18

how do automatic stabilisers work when GDP increases (boom)

Answer 18

• tax revenue rises (tax more)
• welfare costs fall (gov spending decreases)
• limits the upturn of the boom
• fiscal finances improve (budget surplus)

Question 19

how do automatic stabilisers work when GDP decreases (recession)

Answer 19

• tax revenue falls (tax less)
• welfare costs rise (gov spending increases
• limits the downturn of the recession
• fiscal finances tighten (budget deficit)

Question 20

how do the multiplier effect and automatic stabiliser relate

Answer 20

increase in AD:
- multiplier effect wants to increase more
- automatic stabiliser works against it and limits the growth in output

decrease in AD:
- multiplier effect wants to decrease more
- automatic stabiliser works against it and limits reduction in output

Question 21

transfer payments definition

Answer 21

welfare payments provided to ensure a minimum standard of living

Question 22

capital spending definition

Answer 22

provision and maintenance of key national infrastructure items

Question 23

what 3 things does the government spend their money on

Answer 23

• public goods (street lights, police)
• Quasi-public goods (roads)
• merit goods (healthcare, education)

Question 24

current spending definition

Answer 24

the ongoing running costs of government services

Question 25

what 4 factors affect government spending

Answer 25

• politics (differences in taxes and what to spend on and how much)
• economic performance (recession or boom)
• demographics and lifestyles (aging population, unhealthy lifestyles, costs a lot for NHS to treat)
• finances (borrowed a lot of money and a lot of debt over the years)