Week 6 - Fiscal policy / Multiplier & Gov growth

Question 1

What is fiscal policy?

Answer 1

It is the use of government spending and taxation to influence the economy.

Question 2

Why does the government use fiscal policy?

Answer 2

To promote a strong and sustainable growth and reduce poverty.

Question 3

What is discretionary fiscal policy?

Answer 3

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.

Question 4

What is automatic fiscal policy?

Answer 4

This represents the overall design or framework of the government spending and taxation.

Question 5

What is expansionary fiscal policy and what are the pros and cons?

Answer 5

Helps speed up the economy or increase economic growth.
Pros = Reduce unemployment
Cons = can lead to inflation.

Question 6

What is contractionary fiscal policy and what are the pros and cons?

Answer 6

Helps slow down the economy or slow economic growth.
Pros = Reduces inflation
Cons = increases unemployment

Question 7

What methods does the Government and RBA have at their disposal to help effect the economy?

Answer 7

Fiscal = Taxes and government spending
Monetary = Interest rates and money supply

Question 8

What could the Government and RBA do to implement a tight policy?

Answer 8

Fiscal = Reduce spending and increase taxes
Monetary = Increase interest rates

Question 9

What could the Government and RBA do to implement a loose policy?

Answer 9

Fiscal = Increase spending and decrease taxes
Monetary = Decrease interest rates

Question 10

What is the budget and how do you determine a deficit or surplus?

Answer 10

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

Question 11

What is an automatic stabiliser?

Answer 11

Are transfers payments (welfare) and taxes that automatically increase or decrease along with the business cycle.

Question 12

What is the balance of payments and how do you determine a deficit or surplus?

Answer 12

It is the difference between exports and imports.
EX greater than IM = surplus
IM greater than EX = deficit

Question 13

What are the aspects of the equilibrium in the flow? What are the leakages and injections?

Answer 13

Leakages - S = savings / T = taxes / IM = imports

Injections - I = Business / G = gov spending / EX = export

Question 14

What would happen is I + G + EX > S + T + IM

Answer 14

National income will rise

Question 15

What would happen is I + G + EX < S + T + IM

Answer 15

National income will contract

Question 16

What is the keynesian approach to fiscal policy?

Answer 16

When the private sector is not spending, then the government should inject money into the flow.

Question 17

What is the multiplier effect?

Answer 17

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.

Question 18

How does the multiplier effect work?

Answer 18

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.

Question 19

Multiplier equation?

Answer 19

1-c (1-t) + m
c = marginal propensity to consume
t = marginal tax rate
m = marginal propensity to import

Question 20

Keynesian prescription to calculate the amount of government spending?

Answer 20

Output gap (diff between actual and potential
divided by
multiplier (1-c(1-t)+m)

Question 21

What is the crowding out effect?

Answer 21

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..

Question 22

Is government debt a problem?

Answer 22

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.