week 3

Question 1

what is fiscal policy

Answer 1

use of the government budget to achieve macroeconomic objectives

Question 2

how do we calculate national debt?

Answer 2

National Debt = Past Deficits − Past Surpluses + Debt Interest

Question 3

how does national debt affect sustainability of fiscal policy?

Answer 3

▶ Current and future taxpayers benefit from reduction of debt interest
▶ Rising debt threatens prudent management of public finances
▶ Implications for future taxation

Question 4

what automatic stabilisers

Answer 4

Automatic stabilisers are changes in fiscal policy that reduce output responses to expenditure shocks

they are automatic in the sense they adjust with the business cycle

Question 5

how is the tax system an automatic stabiliser?

Answer 5

As the economy enters a recession, tax revenues fall automatically as direct taxes are closely related to income This stimulates aggregate expenditure thereby reducing the magnitude of economic
fluctuations

Question 6

how is government spending an automatic stabiliser

Answer 6

As the economy enters recession, transfer payments increase
This stimulates aggregate expenditure at a time when there is insufficient expenditure to maintain full employment

the larger the government sector/spending the larger the stabiliser

Question 7

in the short run we assume government expenditure to be…

Answer 7

autonomous ( expected)

Question 8

while will taxes result in less marginal propensity to consume

Answer 8

The government expenditure multiplier will be smaller in the presence of taxes

Some income will leak out of the circular flow via taxes before households have a chance to spend or save it

Hence, the marginal propensity to consume out of total income will be smaller
Less consumption and hence additions to income will be generated at each round of
expenditure

Question 9

what is the full equation for aggregate expenditure

Answer 9

AE = consumption + investment + government spending ( exports - imports)

Question 10

what does the export demand depend on?

Answer 10

▶ Real GDP in the rest of the world
▶ Prices of UK made goods and services relative to foreign made goods and services
▶ Nominal exchange rates

Question 11

what does the import demand depend on?

Answer 11

Import demand depends on
▶ Real GDP in the UK
▶ Prices of foreign made goods and services relative to UK made goods and services
▶ Nominal exchange rates

Question 12

what components of Aggregate expenditure are autonomous

Answer 12

investment, government spending and exports as they are apart of expected investment of firms