Week 6 - Fiscal policy / Multiplier & Gov growth Flashcards
What is fiscal policy?
It is the use of government spending and taxation to influence the economy.
Why does the government use fiscal policy?
To promote a strong and sustainable growth and reduce poverty.
What is discretionary fiscal policy?
It is when the government change spending or taxation to influence the performance of the economy. Also known as fiscal stimulus and it is generally implemented in emergency’s.
What is automatic fiscal policy?
This represents the overall design or framework of the government spending and taxation.
What is expansionary fiscal policy and what are the pros and cons?
Helps speed up the economy or increase economic growth.
Pros = Reduce unemployment
Cons = can lead to inflation.
What is contractionary fiscal policy and what are the pros and cons?
Helps slow down the economy or slow economic growth.
Pros = Reduces inflation
Cons = increases unemployment
What methods does the Government and RBA have at their disposal to help effect the economy?
Fiscal = Taxes and government spending Monetary = Interest rates and money supply
What could the Government and RBA do to implement a tight policy?
Fiscal = Reduce spending and increase taxes Monetary = Increase interest rates
What could the Government and RBA do to implement a loose policy?
Fiscal = Increase spending and decrease taxes Monetary = Decrease interest rates
What is the budget and how do you determine a deficit or surplus?
The government is responsible for the budget.
It is the difference between government spending and taxes.
G greater than T = deficit
T greater than G = surplus
What is an automatic stabiliser?
Are transfers payments (welfare) and taxes that automatically increase or decrease along with the business cycle.
What is the balance of payments and how do you determine a deficit or surplus?
It is the difference between exports and imports.
EX greater than IM = surplus
IM greater than EX = deficit
What are the aspects of the equilibrium in the flow? What are the leakages and injections?
Leakages - S = savings / T = taxes / IM = imports
Injections - I = Business / G = gov spending / EX = export
What would happen is I + G + EX > S + T + IM
National income will rise
What would happen is I + G + EX < S + T + IM
National income will contract
What is the keynesian approach to fiscal policy?
When the private sector is not spending, then the government should inject money into the flow.
What is the multiplier effect?
It is an induced increase in consumption that results from an initial increase in government expenditure.
A change in one component of the aggregate demand can lead to a multiplied final change in the level of GDP.
How does the multiplier effect work?
Injections of new demand for goods and services stimulate people’s spending “one persons spending is another’s income”
It leads to a bigger final effect of GDP and employment… However the value of the multiplier depends on leakages.
Multiplier equation?
1-c (1-t) + m
c = marginal propensity to consume
t = marginal tax rate
m = marginal propensity to import
Keynesian prescription to calculate the amount of government spending?
Output gap (diff between actual and potential
divided by
multiplier (1-c(1-t)+m)
What is the crowding out effect?
When government borrow money during a deficit and spends money, it’s borrowing may increase increase rates and spending drive down private sector spending
It may cause interest rate to rise as it could use up all the lending capacity in the economy..
Is government debt a problem?
Yes:
It could increase taxes in the future.
It could reduce the gov capacity to pay for public servants
It could result in no investment in infrastructure
It could pose a problem to fund future liabilities (pensions)
The country could default on it’s debt.
