week 7 Flashcards

1
Q

The four-sector model

A
  • includes household consumption (Cd)
  • firms: planned investment (Ip)
  • government sector: government spending (G)
  • export (X)

PAE = Cd + Ip + G + X

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2
Q

income-expenditure multiplier

A
  • change in exogenous spending directly affects Y

- higher Y induces further increases in spending, leading to an output higher than increase in spending that started it

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3
Q

alternative equilibrium condition in the four sector model

A
  • for equilibrium to occur, any injections of expenditure into the economy are exactly matched by withdrawal of expenditure
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4
Q

fiscal policy

A
  • the use of the commonwealth budget to achieve macroeconomic objectives
  • designed and implemented to achieve a pre-determined level of output in the economy
  • can be automatic / discretionary
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5
Q

automatic fiscal policy

A
  • is a fiscal policy action triggered by the state of the economy with no government action
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6
Q

discretionary fiscal policy

A
  • is a policy action that is initiatted by an act of parliament
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7
Q

discretionary fiscal policy - changes in G

A
  • intuition: as government purchases of goods and services is a component of PAE, deficiencies in PAE can be compensated with changes in g.spending
  • g.spending is exogenous, therefore changes in G will shift the PAE line
  • contractionary gap
  • > increase in G shift PAE up and increase level of actual output
  • expansionary gap
  • > decrease in G will shift PAE down and decrease level of actual output
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8
Q

discretionary fiscal policy - changes in T

A
  • discretionary fiscal policy can also the take form of changes to the level and types of taxes and transfer payments in the economy
  • payments are not for the purchases of current goods and services, and are not part of G.
  • > therefore these changes do not affect PAE directly
  • affect level of disposable income (Y-T)
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9
Q

three qualifications of fiscal policy

A
  • fiscal policy and the supply side
  • sustainability ( deficits)
  • inflexible
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10
Q
  • supply-side effects of FP
A
  • affects employment, GDP and aggregate supply
  • G spending on public capital (e.g roads) play a role in the growth of potential gdp
  • taxes and transfer payments play a role in affecting incentives and therefore economic behaviour
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11
Q

fiscal sustainability

A

expansion -> deficits
- politicians can send this debt to future generations

  • rules need to be created to prevent this
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12
Q

FP is relatively inflexible

A
  • lags
  • recognition lag
  • > time it takes to figure out that fiscal policy needs to start
  • law making lag
  • > time it takes to pass laws
  • impact lag
  • > time it takes from passing a tax or spending change to its effect
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13
Q

FP and distribution of income

A
  • manipulating tax manipulates distribution of income
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